Per Lewis (JO:) Krauskopf
NEW YORK (Reuters) – U.S. inflation data in the coming week could test the nerves of stock investors and further fuel concerns about rising government bond yields and uncertainty over Donald Trump’s policy plans.
After a string of outstanding years, the stock market has gone out of whack in 2025, with the benchmark down about 1% so far this year.
A resurgence of inflation is seen as one of the key risks facing stocks, and the Federal Reserve is already pulling back on its projected interest rate cuts as it expects inflation to rise at a faster pace than it previously predicted.
Markets shrugged off expectations for the next rate cut until June after Friday’s US jobs report, with stocks falling sharply and government bond yields hitting new highs after December’s jobs data.
The monthly consumer price index, released on Jan. 15, is one of the most closely watched measures of inflation and could spark further market volatility if it comes in higher than expected, investors say.
Monthly inflation data can have “too much presence in the market,” said Marta Norton, chief investment strategist at retirement and wealth services provider Empower.
“If we were to see inflation pick up again, that would worry the markets,” Norton said. “With every puff print, there’s just that prick-and-pins moment.”
The focus turned to inflation data after a surprisingly strong employment report for December. Wages rose by 256,000, well above the estimated 160,000, while the unemployment rate fell to 4.1%.
Strong job growth “added to uncertainty about the trend in inflation as well as the prospect of the Fed cutting interest rates in 2025,” said Sam Stovall, chief investment strategist at CFRA.
December’s CPI is expected to show a 0.3% month-on-month increase, according to a Reuters poll.
Although the Fed was confident enough that inflation was moderate to begin cutting interest rates in September, the pace of annual inflation remained above the Fed’s 2% target. The Fed now projects inflation to rise 2.5% in 2025.
Minutes from the Fed’s latest meeting, released Wednesday, showed officials were also concerned that Trump’s policies on trade and immigration could prolong efforts to reduce inflation.
The Fed is widely expected to pause its rate-cutting cycle at its next meeting at the end of the month, but stronger-than-expected CPI data could push back market projections for further easing even later in the year.
Given the “looming questions” about fiscal policy and potential tariffs, “if the inflation picture that we have without those risks also moves in the wrong direction, I think that could challenge market expectations,” said Matt Orton, chief market strategist at Raymond (NS:) James Investment Management.
The hot CPI number could also push up government bond yields further and have broad ramifications. This week’s sell-off in government bonds around the world, which included 10-year British gilt yields hitting their highest level since 2008, sent waves through financial markets. Yields rise when bond prices fall.
After the jobs data, the benchmark hit 4.79%, its highest level since November 2023. Higher yields can weigh on stocks in several ways, including raising borrowing costs for consumers and businesses. A rise in Treasury bond yields can improve the attractiveness of lower-risk bonds, increasing investment competition for stocks.
The CPI data marks a busy few weeks for the markets. Earnings results from major banks such as JPMorgan and Goldman Sachs in the coming week mark the start of fourth quarter reports for US companies. According to LSEG IBES, the S&P 500 company’s earnings are expected to increase by nearly 10% in the quarter compared to the previous year.
President-elect Trump will also take office on January 20. Investors are bracing for swift action by his administration in areas such as tariffs on imports from China and other trading partners, as well as tighter immigration controls.
Speculation about Trump’s plans is already pushing the markets. For example, the dollar fell and European stocks rose after a Washington Post report this week said Trump aides were exploring tariff plans that would cover only critical imports. Trump denied the report.
“We’re still waiting to understand the strength of Donald Trump’s bark bite,” said Bryant VanCronkhite, senior portfolio manager at Allspring Global Investments.
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