‘Market Anxiety’ Returns After Latest Inflation Surge, 10-Year Treasury Jumps Above 2%

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Topline

The stock market fell in volatile trading on Thursday after a worse than expected inflation reading—with consumer prices spiking 7.5% in January—raised investor concerns that the Federal Reserve could tighten monetary policy too quickly and send markets into a tailspin.

Investors may be in for a “rough ride” until surging inflation levels moderate.

Drew Angerer/Getty Images

Key Facts

Stocks initially plunged on the news but pared back losses: The Dow Jones Industrial Average fell 0.2%, less than 100 points, while the S&P 500 lost 0.4% and the tech-heavy Nasdaq Composite 0.5%.

Inflation rose 0.6% from December, a bigger increase than last month and higher than the 0.4% economists were expecting, thanks to broad gains across food, electricity and shelter prices, the Labor Department said.

Consumer prices are now up a whopping 7.5% from a year ago, still currently at roughly 40-year highs.

The red-hot inflation data also sent government bond yields surging higher: The 10-year Treasury note jumped above 2% on Thursday, its highest level since August 2019 and up from 1.5% in December.

Big Tech and other growth stocks came under pressure following the inflation data, with shares of Amazon and Microsoft each down over 1%, while shares of bank stocks rose on the prospect of higher interest rates.

Solid earnings reports from several companies helped limit the market’s downside, however: Entertainment giant Disney rose nearly 6%, while ridesharing service Uber gained 4% and soft drink giant Coca Cola 1.5%.

Crucial Quote:

“With another surprise jump in inflation in January, markets continue to be concerned about an aggressive Fed,” says Barry Gilbert, asset allocation strategist for LPL Financial. “While things may start getting better from here, market anxiety about potential Fed overtightening won’t go away until there are clear signs inflation is coming under control,” he predicts.

Key Background:

The market had moved higher in the days before the latest inflation data—and tech stocks in particular have enjoyed a solid rebound this week. Stocks have been struggling for direction in February, moving slightly higher after last month’s broad sell-off resulted in the market’s worst start to a year since 2009. January’s red-hot inflation reading will likely signal to investors that the Federal Reserve will continue to move aggressively in hiking interest rates and removing stimulus, a prospect which has sent yield rates surging.

What To Watch For:

“I expect that we’ll see a return of the volatility that was prevalent for most of the month of January in the wake of this report,” says Brian Price, head of investment management for Commonwealth Financial. “Investors may want to buckle up as it could be a rough ride for risk assets until inflationary data starts to abate, and I expect that it will, as we move through the year.”