Markets shrug off rising inflation

Wednesday’s inflation data confirmed that price pressures in the US continue to build, but the market reaction was surprisingly muted.

 
A large part of the inflation story remains tied to energy prices, which investors are already tracking in real time through developments in the Middle East. As a result, the latest CPI report was largely viewed as backward-looking, even though it showed headline inflation rising above 4% for the first time since May 2023. More importantly for markets, core inflation came in slightly softer than expected on a monthly basis, easing fears that the Federal Reserve—and, crucially, new Chairman Kevin Warsh—would be forced into a rate hike at next week’s meeting.
 
Does that mean the path higher for equities is clear once again? Not necessarily. While investors appear comfortable treating the latest inflation data as manageable, the broader picture remains challenging. Underlying price pressures continue to build, as highlighted by the rise in supercore inflation, suggesting that inflation is becoming more deeply embedded in the economy. Markets may still be underestimating the risk that interest-rate expectations move higher over the coming months, which would act as a headwind for equity valuations.

At the same time, the “buy-the-dip” mentality remains firmly intact. Each pullback over the past week has attracted fresh demand, preventing a deeper correction from taking hold. The next major catalyst is now the Federal Reserve meeting. Until then, market direction is likely to be driven largely by sentiment and developments in the Middle East. Once investors gain greater clarity on the Fed’s policy path under Warsh, attention is likely to shift back toward the earnings outlook and whether strong corporate profitability can continue to offset the growing macroeconomic headwinds.

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