Good morning! Today’s edition covers the hot inflation report, why stocks could see a sudden pullback, and Trump and Powell’s clashing views on interest rates. First time reading? Join 190,000 self-directed investors gaining an edge every morning. Sign up here. 

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Momentum is getting less obvious

The stock market’s path to extending its historic bull run is suddenly narrowing. 

Fresh inflation data suggests the Federal Reserve — arguably the market’s strongest tailwind the last year — won’t be as accommodating as investors want. 

The January consumer price index report rose to 3.0% from a year ago, while core CPI — which excludes energy and food — rose 3.3%.

Both readings ticked higher from December, cementing concerns that inflation remains squarely above the Fed’s 2% target.

For months, investors have bid up stocks on the premise that rate cuts were imminent. That bet is looking incredibly tenuous, and markets are responding in kind. 

Traders now assign a 26% probability that the central bank won’t cut rates at all in 2025, more than double the odds from a week ago. Similarly, traders on the prediction market Kalshi see a 30% chance of one rate cut this year.

The latest data complicate matters for both Fed Chair Jerome Powell and President Trump. 

Powell has already slashed borrowing costs by 100 basis points since September, while Trump has repeatedly called for even deeper reductions.

Yet with renewed inflation concerns — not to mention the president’s looming vision for tariffs — policymakers are in a bind. 

“Interest Rates should be lowered, something which would go hand in hand with upcoming Tariffs!!!,” Trump wrote in a Truth Social post Wednesday. “Lets Rock and Roll, America!” 

Those comments came within a day of Powell telling lawmakers that the Fed isn’t rushing to cut rates. 

Testing the Goldilocks market

Stocks have defied even the most bullish forecasts since bottoming in October 2022, with the S&P 500 returning roughly 65% in that span.

To veteran strategist Tom Essaye, who writes the Sevens Report, markets will need its almost picture-perfect conditions to keep that momentum: 

Stocks can overcome the uncertainty of tariffs so long as each of those factors hold, in Essaye’s view. But the latest inflation report suggests the Goldilocks scenario is already evaporating. 

Trump has floated various angles for tariffs, but if implemented poorly, inflation could move further in the wrong direction and stocks could see a double-digit pullback, Essaye said.

“The most likely path for this market in the near term is a more volatile chop sideways,” he wrote in a note to clients.

“I say that because it’s unlikely that we get consistently positive or negative news flow from these four factors (growth, Fed rate cuts, AI enthusiasm and policy).”

The bull case is still present

None of this is to say the bull case for stocks has vanished.

It just takes a little more mental gymnastics than a week ago. 

Equities are still one of the best available hedges against inflation, particularly when you consider earnings per share are taken in nominal terms.

Rising inflation, then, means rising nominal results, Interactive Brokers’ Steve Sosnick said Wednesday. 

“And thus, the dips get bought, even with a hot hot hot inflation report,” Sosnick said.

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Elsewhere:

📉Stocks are falling in pre-market trading. The S&P 500 and Nasdaq futures traded lower early Thursday ahead of new inflation data and amid Ukraine peace talks. President Trump said Wednesday he had a “lengthy” call with Russia’s Putin, and they agreed to begin talks to end the conflict.

💰️Ray Dalio urged the US to cut debt. The hedge fund mogul warned that the nation faces an “economic heart attack” if it doesn’t significantly reduce its mountain of debt. He said leaders should pledge to shrink the US budget deficit from 7.5% to 3% of GDP or resign. As of this week, US gross national debt hovers at $36.22 trillion. (CNBC)

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