CPI Report for January Results in a 400-Point Drop for the Dow, Escalating the Selloff

After the consumer price index was released for January, stocks fell Tuesday, reversing earlier gains, as it showed that inflation grew at a 6.4% annual rate in January, slightly higher than expected.

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There has been a drop of 407 points or 1.19% in the Dow Jones Industrial Average. There was a loss of 0.94% for the S&P 500 index and a loss of 0.78% for the Nasdaq composite index. Yields on U.S. Treasury bonds ticked higher, with the yield on the 6-month U.S. Treasury bond poised to close above 5% for the first time since July 2007 for the first time since the beginning of 2008.

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Inflation readings that remain stubbornly high sent stocks tumbling. A 0.5% increase in the consumer price index for the month of July translated into a 6.4% increase for the year as a whole. A Dow Jones survey suggested that the basket of goods and services rose 0.4% on the month and 6.2% on the year, which was slightly higher than economists' estimates of 0.4% on the month and 6.2% on the year. A slight gain was shown in the December report instead of a decline as was previously reported.

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On Tuesday morning, JPMorgan's trading desk predicted that an annual increase of 6.4% to 6.5% would result in the S&P 500 losing about 1.5%, based on their prediction before the number was released. It was better than worst fears that the S&P 500 would decline by 2.5% if inflation increased for a year in excess of 6.5%, an acceleration in inflation that would have triggered a decline of 2.5% in the S&P 500.

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Although the report was better than expected, it is unlikely that the Fed will back off its campaign to tighten monetary policy due to the report.

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“The reading of the CPI today did not contain a lot of surprises, but it still is a reminder that even if inflation has peaked, it may take some time before it moderates back to normal levels,” commented Mike Loewengart, head of the Morgan Stanley Global Investment Office's model portfolio construction team.

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“With the labor market as tight as it is today, there is still a question as to whether inflation can fall to the Fed's target level given the tightening of the labor market," he added. "That could provide for a soft landing, but it remains to be seen when the Fed will shift away from rate hikes and whether the labor market will lose its resilience as a result."

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Besides looking at the CPI, investors will also be paying close attention to earnings in order to get an insight into the health of the consumer. A number of companies are scheduled to report their earnings this week, including Kraft Heinz, Boston Beer, and DoorDash.