US Core CPI cooling down ignites the market but analysts say inflation risks still exist

The US CPI for December, released on Wednesday, was relatively mild. The CPI growth rate in December was faster than expected, but the core CPI growth rate was lower than expected. This sparked a significant rebound in the US stock market and bond market, but traders and investors warned that the market may still be concerned about the pace of inflation. Market participants stated that the future path is still uncertain due to the Federal Reserve's potential further interest rate cuts and the impact of incoming President Trump's actions on issues such as taxation and tariffs. B. Riley Wealth market strategist Art Hogan stated, "The issues that are driving higher interest rates and weighing on the stock market still exist. We just don't know whether the tariffs we will see will be targeted or comprehensive, and we don't know what policy measures we may see in other areas that could lead to inflation or growth." The 10-year US Treasury bonds recovered from the losses after last Friday's strong employment report, with the yield falling to 4.66%. In December of last year, the Federal Reserve lowered its interest rate expectations and predicted a stronger inflation in 2025 than previously expected. Since then, US Treasury yields have sharply risen in recent weeks. Interactive Brokers market strategist Steve Sosnick stated, "This data is slightly better than expected, but as long as there is some good news, traders will be actively engaging. This is a number and a response that we must look positively at, even though it is likely amplified by the negative emotions we have been contending with." Jeff Weniger, the stock strategy director of New York asset management company WisdomTree Inc., said that before the CPI report was released, "There were rumors that we might see a rate hike." However, concerns about the potential impact of Trump's policies on inflation still persist. Federal Reserve officials pointed out on Wednesday that uncertainty in the coming months is increasing, and they are waiting to see the new government's policy direction. Although they did mention that Wednesday's data showed inflation continuing to slow down. Following the CPI report, Rick Rieder, Chief Investment Officer of BlackRock's Global Fixed Income division, stated that progress in inflation "may be slow and uneven, especially due to the enormous uncertainty that fiscal policy changes will bring to the economy next year; for example, changes in tariffs and trade regulations could indeed push up inflation in core goods for a period." As the market still relies on data, volatility may become more widespread. WisdomTree's fixed income strategy director Kevin Flanagan expects that daily fluctuations of 10 to 15 basis points in the 10-year US Treasury bond yield may become the new normal. After the data release, rate futures traders still expect the Federal Reserve to wait until June to cut rates. However, they now estimate a 50% chance of a second rate cut by the end of the year. By contrast, before the report was released, the market was only betting on one rate cut in 2025. Tina Adatia, Managing Director of Fixed Income Client Portfolio Management at Goldman Sachs Asset Management, stated in a report to clients that the CPI data strengthens the case for further rate cuts, but "the Federal Reserve still has room for patience." Adatia said, "More good inflation data is needed for the Federal Reserve to further ease policy."