US CPI: The dilemma for equity investors US CPI: The dilemma for equity investors US CPI: The dilemma for equity investors

US CPI: The dilemma for equity investors

Equities 7 minutes to read
Peter Garnry

Head of Saxo Strats

Summary:  The US January CPI report shows that core inflation across different measures including the US Services core inflation excluding energy actually rose in January remaining stubbornly high around 7% annualised inflation. S&P 500 futures initially reacted positively to the report and what looks like a weird behaviour most likely reflecting clearing of hedges and other derivatives positions before settling on the clearer interpretation that inflation remains high. Investors are facing a dilemma in equities as high inflation will reflect no recession but likely leading to higher interest rates and lower equity valuations.

Core inflation remains stubbornly high

The US January CPI figure is 0.5% m/m vs est. 0.5% m/m with the December figure revised to 0.1% m/m from previously -0.1% m/m, while the core CPI is 0.4% m/m vs est. 0.4% m/m and revised up to 0.4% m/m from 0.3% m/m in December. The initial reaction was positive across equities with S&P 500 futures rallying as high as 4,186.50 as the US 10-year yield also retreated lower. Commentator initially focused on the core services CPI excluding shelter, which has been highlighted by Fed Chair Powell, which cooled y/y in January.

Outside of this narrow inflation definition, both the headline and core CPI remained high and with the upward revision in December the easing of inflation seems limited. The US Services CPI excluding energy, which is around 57% of the CPI basket, rose 0.55% m/m in January pushing the 6-month average up to 0.59% m/m indicating that the broader US services sector is seeing stubbornly high inflation of over 7% annualised. The initial reaction has shifted to a more negative interpretation with the S&P 500 futures now declining from yesterday’s close while the US 10-year yield is adjusting higher.

Investors are in a dilemma because equities are priced for perfection with equity valuation moving back above historical averages as shown in last week’s equity update. That perfection of no recession, easing inflation, and limited margin pressure among companies is difficult to work out. If China is successful in its reopening and macroeconomic data in the developed world remains that of avoiding a recession then inflation will likely remain higher for longer risking to turn sticky at a much higher level than what the US 10-year yield is currently reflecting. That would cause equity valuations to be under pressure from higher bond yields coupled with margin pressure as China’s reopening should keep commodity prices elevated or even going higher again.

If inflation does in fact ease back to the levels reflected in inflation swaps then the global economy might slip into a recession and that could cause the equity risk premium to increase and equity valuation to decline on top of lower growth. In other words, equity investors are in a dilemma and with strong gains already delivered in the first seven weeks of the year, investors might experience a more bumpy road from here on.

S&P 500 futures | Source: Saxo
Bloomberg Commodity Index Spot | Source: Bloomberg


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (
Full disclaimer (
Full disclaimer (

Saxo Bank (Schweiz) AG
The Circle 38

Contact Saxo

Select region


All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.