Markets surged ahead of Inauguration Day. What happens after today?
Last week, the U.S. equity markets posted their best weekly performance since the November 2024 elections, driven by a bit of good news on the inflation front. The release of the latest inflation data on Wednesday helped fuel a rally, despite some minor technical factors that played a role. Here’s a breakdown of the key developments.
Chief Investment Officer Thierry Hasse
Inflation data shows modest improvement
The Bureau of Labor Statistics Consumer Price Index report released on Jan. 15 revealed that the “core” inflation rate, which excludes the volatile food and energy components, rose at an annual rate of 3.2%. This was slightly lower than the previous month’s 3.3% and better than market expectations.
However, the apparent progress in inflation is primarily due to the rounding of numbers. The actual core CPI was 3.248%, rounded down to 3.2%. A reading of 3.25% would have been rounded up to 3.3%. While the 0.002% difference may seem trivial, it was enough to spark a rally in equity markets and send Treasury yields tumbling.
Bond market reaction: Short-term relief
The release of the CPI data triggered an immediate drop of 16 basis points in the benchmark 10-year Treasury yield. This was a significant shift after the Federal Reserve’s “recalibration” of monetary policy in September 2024, which had caused yields to rise steadily.
While this decline provides short-term relief for the bond market, inflation remains above 3%, far from the Federal Reserve’s 2% target. Additionally, the U.S. is facing large budget deficits, and the incoming administration’s policies—such as tariffs and tax cuts—are likely to put upward pressure on inflation. As a result, we believe the upward trend in U.S. bond yields is likely not over.
Strong earnings reports bolster market sentiment
On the same day as the CPI release, several major U.S. banks reported strong earnings. JPMorgan posted a net income of $14 billion, Citigroup reported $2.86 billion, and Goldman Sachs earned $4.11 billion. These solid results, combined with the potential for fewer banking regulations and increased mergers and acquisitions activity, are creating a positive environment for the U.S. financial markets. Investors are optimistic that these early earnings reports signal a solid reporting season for the broader stock market.
Inauguration Day and anticipated market volatility
Today, as President Donald Trump assumes office, investors are closely monitoring potential executive orders and policy changes that could impact the markets. Key areas of focus include:
- Immigration Policies: Changes could significantly affect industries such as construction and agriculture, which rely heavily on undocumented workers.
- Tariffs and Tax Policies: Incoming measures may introduce further uncertainties, potentially leading to inflationary pressures.
- Sector Impacts: Many sectors of the economy could see significant shifts, depending on the administration’s decisions.
Given the potential for increased volatility, investors are advised to stay informed and prepared for market fluctuations. We’ll be here to help you navigate it all.
The information contained herein represents the views of Elevage Partners at a specific point in time and is based on information believed to be reliable. No representation or warranty is made concerning the accuracy of any data compiled herein In addition, there can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Any statement non-factual in nature constitutes only current opinion which is subject to change. These materials are provided for informational purposes only and do not constitute investment advice. Any reference to a security listed herein does not constitute a recommendation to buy, sell, or hold such security. Past performance is no guarantee of future results. The historical returns of any securities and/or sectors mentioned in this commentary are not necessarily indicative of their future performance.