Rising US inflation in January reduces chance of Fed rate cut

The odds of a US Federal Reserve rate cut took another hit after inflation came in hotter than expected in January, with the consumer price index rising 3% y-o-y, the highest increase since June, according to Bureau of Labor Statistics data. While only marginally higher than December’s 2.9%, the uptick was enough for traders to dial back projections of a 2025 rate cut, pushing Treasury yields above 4.6%, CNBC reports.

What’s driving inflation? Shelter costs accounted for nearly 30% of January’s price increase, rising 0.4%. Gasoline jumped 1.8%, contributing to a 1.1% increase in overall energy costs. Food prices also ticked up 0.4%, with grocery costs rising 0.5%. Meanwhile, used car prices climbed 2.2%, and motor vehicle insurance surged 2%. Excluding food and energy, core CPI rose 3.3% y-o-y.

REMEMBER- Donald Trump’s tariffs are expected to stoke inflation further. The US president reiterated earlier this week that rates “should be lowered, something which would go hand in hand with upcoming tariffs,” CNBC reports. Some 90% of the economists in Reuters’ October 2024 and February 2025 polls raised their inflation estimates for 2025 following Trump’s election victory.

ICYMI- Trump has already imposed a 10% tariff on USD 450 bn worth of Chinese goods and 25% tariffs on steel aluminum imports and vowed to impose reciprocal tariffs matching those imposed by other US trade partners. The president has also threatened to impose 25% tariffs on US imports from Mexico and Canada, with the measures on hold until 1 March as the neighboring countries continue to negotiate over border security. White House Press Secretary Karoline Leavitt also signaled more trade actions could be announced soon, CNBC reports.

Market reax: Markets struggled to process the mixed signals, with the S&P 500 falling 0.27% and the Dow dropping 0.5%, while the Nasdaq remained near flat.

Are cuts still possible? A Reuters poll of 101 analysts suggests that Fed officials will adopt a wait-and-see approach as they assess how tariffs and other policy changes could affect the economy before making any further rate cuts.

MARKETS THIS MORNING-

Most Asian markets are in the green, tracking gains on Wall Street, save for Japan’s Nikkei, which is down 0.6%, and Topix, down 0.2%. Meanwhile, Wall Street futures are little changed after Trump’s announcement of reciprocal tariffs.

THE CLOSING BELL-

The ADX stayed flat yesterday on turnover of AED 1.4 bn. The index is up 2.6% YTD.

In the green: Abu Dhabi National Takaful (+15.0%), Commercial Bank International (+14.1%) and Al Khaleej Investment (+7.3%).

In the red: Agthia Group (-9.9%), Al Wathba National Ins. (-6.3%) and Phoenix Group (-3.7%).

Over on the DFM, the index rose 0.3% on turnover of AED 996.3 mn. Meanwhile, Nasdaq Dubai closed down 0.3%.