Inflation report could rattle markets after bond yields rise By Reuters

by boy name (JO:) Krauskopf

NEW YORK (Reuters) – U.S. inflation data next week could test the nerves of stock investors and further fuel concerns about rising Treasury yields and uncertainty about Donald Trump’s policy plans.

After back-to-back standout years, the stock market has faltered in 2025, with the benchmark down about 1% so far this year.

A resurgence in inflation is seen as one of the key risks facing stocks, and the Federal Reserve has already backed off plans to cut interest rates as it expects inflation to rise at a faster rate than previously expected.

Markets postponed expectations of the next interest rate cut until June after Friday’s explosive U.S. jobs report. Stock prices tumbled and Treasury yields hit a new milestone after December’s employment data.

The monthly consumer price index, due out Jan. 15, is one of the most closely watched indicators of inflation and could trigger further market volatility if it is higher than expected, investors said.

Marta Norton, chief investment strategist at retirement and wealth services provider Empower, said monthly inflation data “can have a huge presence in the market.”

“If inflation accelerates again, that would be a concern for markets,” Norton said. “Every inflation print has this kind of pins and needles moment.”

Inflation data came into focus after the surprisingly strong December employment report. Payrolls rose by 256,000, well above expectations of 160,000, and the unemployment rate fell to 4.1%.

Strong employment growth “has not only added to uncertainty about the inflation trend, but also the prospect that the Fed will cut interest rates in 2025,” said Sam Stovall, chief investment strategist at CFRA.

CPI is expected to rise 0.3% on a monthly basis in December, according to a Reuters poll.

The Fed was confident enough to begin cutting interest rates in September as inflation eased, but the annual pace of inflation is still above the Fed’s 2% target. The Federal Reserve currently expects inflation to rise 2.5% in 2025.

Minutes of the Federal Reserve’s latest meeting released on Wednesday showed officials were also concerned that President Trump’s trade and immigration policies could delay efforts to lower inflation.

The Federal Reserve is widely expected to halt its rate-cutting cycle at its next meeting later this month, but firmer-than-expected CPI data could delay market expectations of further easing later this year as well.

“Given the ‘uncertain questions’ around fiscal policy and potential tariffs, we think that could run counter to market expectations if the inflation picture we de-risk is moving in the wrong direction,” said Matt Orton, chief market strategist. raymond (NS:) James Investment Management.

A hot CPI number could push Treasury yields further higher and have far-reaching implications. A sell-off in government bonds around the world has sent ripples through financial markets, with the UK 10-year gold bond yield hitting its highest level since 2008 this week. When bond prices fall, yields rise.

Employment data showed the benchmark rose 4.79%, its highest level since November 2023. Higher yields can put pressure on stocks in several ways, including by raising borrowing costs for consumers and businesses. Rising Treasury yields may improve the attractiveness of lower-risk bonds and increase competition for investments in stocks.

CPI data dominates the headlines during a busy few weeks in the markets. Next week’s earnings results from major banks such as JPMorgan and Goldman Sachs kick off their fourth-quarter reports for corporate America. According to LSEG IBES, earnings for S&P 500 companies are expected to increase by about 10% this quarter compared to the same quarter last year.

President-elect Trump will also be inaugurated on January 20th. Investors are bracing for swift action from the Trump administration in areas such as tighter controls on immigration as well as tariffs on imports from China and other trading partners.

Speculation about Trump’s plans is already shaking markets. For example, the dollar fell and European stocks rose after the Washington Post reported this week that Trump’s associates were exploring a tariff plan that would apply only to critical imports. Trump denied the report.

“We’re still waiting to understand how strong Donald Trump’s bark is,” said Bryant VanCronkhite, senior portfolio manager at Allspring Global Investments.

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