Wall Street bulls get clipped by sticky inflation reports

MANHATTAN (CN) — Investors took a few steps backwards this week, as new inflationary data show prices are ticking up again.

A pair of reports by the U.S. Bureau of Labor Statistics this week frightened investors and caused the first major setback in equities for the year. By the closing bell on Friday, the Dow Jones Industrial Average had lost 44 points for the week, the S&P 500 had dropped 21 points and the Nasdaq had declined 215 points.

On Wednesday, markets suffered their worst day in roughly a year after the agency released its consumer price index, which showed a 0.3% increase in prices last month — including a 0.4% increase in core item prices.

Both numbers were more than expected. Most of the increase was due to the 0.6% increase in shelter costs, the 0.7% upturn in medical costs and the 1% surge in transportation services.

Still, investors were dismayed by the reading since it means the Federal Reserve is not likely to cut interest rates anytime soon.

While most had expected the Fed to begin cutting rates in March, experts now peg the first rate cut to drop some time during the second quarter.

“Based on a recent strong GDP, jobs, and consumer spending data, the Fed can delay a first rate cut until they see a few more months of inflation trending down to the target [of 2% average],” said Larry Tentarelli, chief technical strategist at the Blue Chip Daily Trend Report.

Some measures, including used vehicles and apparel, actually managed to decrease. Those fell by 3.4% and 0.7%, respectively.

Energy prices also dipped, with gasoline decreasing by 3.3% and fuel oil falling 4.5% last month.

If the latest CPI is merely a blip in the overall trend of lower prices, then Wall Street should return to gains. However, if the report marks “a new pattern of inflation stalling out at current levels — or worse, increasing from here — then the stock market has further to fall,” said Chris Zaccarelli, chief investment officer for the Independent Advisor Alliance.

The inflation report on Friday wasn’t much better — though investors did not panic as they had a few days earlier. According to the agency’s producer price index, final demand increased by 0.3% last month, also slightly above the consensus forecast.

The silver lining, analysts say, is that larger relative gains last January mean that annual inflation still remains on a downward spiral. Annual producer prices are 2.6% higher than a year ago, compared to 4.4% last January.

“While we understand the market’s knee-jerk behavior when it sees too-hot or too-cold data, we think it will take another couple data releases to establish a new trend,” Zaccarelli said. Investors now will be keenly awaiting the personal consumption expenditures price index due at the end of the month.

Fortunately, Wall Street also received some good news this week, too. The Federal Reserve Bank of New York’s manufacturing survey fell by just 2.4 points despite experts forecasting double-digit decreases, while the Philadelphia Fed’s manufacturing survey increased by 5.2 points even though analysts had predicted a 9-point decrease.

Follow @NickRummell

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