Stocks Join Bonds Higher as CPI Fuels Fed Wagers: Markets Wrap

(Bloomberg) — Wall Street got a degree of relief as relatively tame inflation data spurred bigger bets on Federal Reserve rate cuts, with bond yields falling and stocks rising at the end of a wild week for markets. Bitcoin jumped 5%.

Treasuries climbed across maturities, with two-year yields dropping toward their lowest since 2022. Money markets priced in higher chances the Fed will slash rates more than twice this year. About 420 shares in the S&P 500 advanced, with economically sensitive sectors outpacing technology. The Russell 2000 climbed 1.9%. The dollar underperformed most major currencies.

The consumer price index rose 0.2% in January, the smallest gain since July and restrained by lower energy costs. While services costs picked up last month, prices of core goods remained stable. The core CPI rose from a year ago by the least since 2021. The overall gauge also eased on an annual basis.

“There remain some trouble spots, but overall, the trend in inflation is lower and while the Fed is on pause for now, we expect somewhat lower rates as we move forward in 2026,” said Steve Wyett at BOK Financial.

Markets are “breathing easier” as price pressures remain contained, according to Seema Shah at Principal Asset Management.

“Continued labor-market strength gives policymakers cover to stay on hold, while further disinflation in the second half of the year should reopen the door to easing,” she said.

The Fed chose to hold interest rates steady in January given signs of stabilization in the labor market and inflation that’s still elevated. Data this week showed US payrolls rose by the most in more than a year and the unemployment rate unexpectedly fell, suggesting the labor market continued to stabilize at the start of 2026.

The yield on two-year Treasuries slid four basis points to 3.42%. The S&P 500 rose 0.6%, trimming this week’s slide. Its equal-weighted version – which strips out market-value biases – climbed 1.4%. US markets will close Monday for Presidents’ Day.

Gold reclaimed its $5,000 mark. Aluminum fell along with other metals as traders reacted to a possible reduction in the scope of US import tariffs on some aluminum and steel products.

The January CPI inflation report was “benign” relative to fears of a “hot start” to the year, but it’s nowhere near enough to motivate a near-term Fed cut given January’s strong employment report, according to Krishna Guha at Evercore.

Still, he says the latest data increases the likelihood inflation will be on the downslope in time for the Fed to cut in June or if not July.

Two key positives emerge from this report: significantly lower goods inflation and reduced housing inflation persistence. These developments keep the Fed on track for a potential third rate cut, though this remains data-dependent, noted Florian Ielpo at Lombard Odier Asset Management.

“The report fundamentally reinforces the ‘Goldilocks’ narrative – improving growth alongside moderating inflation – creating an ideal environment for diversified investment portfolios,” he said.

While normally these types of inflation readings would give the Fed the go-ahead to ease policy, the robust job numbers that came out Wednesday mean we seemingly are entering a “gold medal” economy with strong growth, a stabilizing job market and lower inflation, noted John Kerschner at Janus Henderson Investors.

“The bond market is basically telling investors ‘nothing to worry about here’,” he added.

The CPI report was confirmation that: tariff-related adjustments have largely run their course, shelter inflation is set to moderate to a below pre-pandemic pace and unit labor costs should also moderate inflation over time, according to Tiffany Wilding at Pacific Investment Management Co.

“This report did not meaningfully change our year-end 2026 inflation outlook of 2.4%, and we are still penciling in two more cuts later this year,” she said.

“Overall, this won’t change Fed policy, but it will ease the path towards a cut in rates sooner rather than later,” said Neil Birrell at Premier Miton Investors. “The US economy looks to be in fine fettle with growth strong, inflation stable, the job market looking firmer and a Fed that has room to maneuver.”

The data suggest that price pressures remain a little too hot for comfort for the time being, but the direction of travel for inflation continues to look to be lower, even if this has proved a bumpy and slow process, according to James McCann at Edward Jones.

“For the Fed, this probably doesn’t change much in the near term,” he said. “We do see scope for further easing later this year. However, this is contingent on a more convincing decline in inflation towards target with the urgency for additional cuts lower now that downside risks in the labor market have seemingly eased.”

In the near-term, the case for a cut looks flimsy and the strong likelihood is that the Fed stands pat in March, barring a shock to the economy in the interim, according to Jim Baird at Plante Moran Financial Advisors. Whether or not another reduction comes in the following months remains to be seen, but will likely require further progress in inflation’s decline to 2%, he said.

“That could change if the pace of layoffs accelerated or job creation faltered meaningfully again in the coming months,” Baird noted. “For now, policymakers appear convinced that the three quarter-point cuts late last year were enough to reduce that risk sufficiently, allowing them to take a patient approach in assessing whether additional easing will be needed.”

The latest data reinforced the sense that inflation isn’t re-accelerating and that the Fed won’t need to extend its pause as long as the more hawkish voices feared, noted Karen Manna at Federated Hermes.

“Paired with the recent jobs data — where revisions told the real story — this report keeps the narrative intact: rate cuts move a little closer into view, even if they’re still not near,” she said.

Traders continue to fully price in a Fed rate cut in July, as well as a strong likelihood of a move in June. Swaps project roughly 63 basis points of easing by year-end — equivalent to two quarter-point cuts and about half of a third — up from 58 basis points on Thursday.

“Today’s inflation report is a relief for investors rattled by AI disruptions in the stock market,” said David Russell at TradeStation. “It also offsets this week’s strong payrolls report, giving the Fed a little more reason to lean dovish. However, it’s still well above the central bank’s target and does little to move the needle near term. Policy expectations are going nowhere in a hurry.”

Although much has been made about whether or not the Fed can keep cutting interest rates this year, the markets seem to care much more about the possibilities of AI disruption across a broad swath of industries right now, according to Chris Zaccarelli at Northlight Asset Management.

“As long as CPI remains in check – which so far it has – then the rates discussion will revert back to the labor market, and under the current economic conditions the Fed is likely to proceed cautiously lowering rates a couple of times later this year,” he said.

The market is going through some volatility right now, which isn’t that surprising, but the bull market is likely to remain intact as long as the economy continues to grow, the labor market holds up, and inflation measures continue to fall, Zaccarelli noted.

“All of these conditions are in place and there haven’t been any new data points this month to contradict that,” he concluded.

Inflation is fading into the background, and behavior is doing more of the work than policy: Consumers are pushing back, companies are absorbing costs, and pricing power is thinning, according to Gina Bolvin at Bolvin Wealth Management Group.

“Markets responded because this gives the Fed flexibility — and shifts the investor focus away from rate cuts and back to fundamentals. The next phase won’t reward macro bets, it will reward earnings discipline and balance-sheet strength,” she said.

While the S&P 500 is still seeing losses for the week, the gauge is not that far from its late-January record.

“After a powerful rally since last April, some consolidation during a typically weak February isn’t unhealthy, just a reset,” said Mark Hackett at Nationwide. “Valuations have moderated, earnings expectations continue to improve, and bond yields are easing. The fundamental backdrop still supports this bull market.”

Still, he noted that leadership is shifting, with investors finding better risk-reward in international, value and small-cap stocks.

Corporate Highlights:

Applied Materials Inc. soared after giving a surprisingly upbeat sales forecast, signaling that demand for artificial intelligence and memory semiconductors is fueling equipment purchases. A data center project expected to be leased by Nvidia Corp. sold $3.8 billion of junk bonds on Friday after receiving about $14 billion of orders from investors, an indication that lenders are eager to continue funding the buildout of artificial-intelligence infrastructure. OpenAI has partnered with two defense technology companies that the Pentagon has selected to compete to develop voice-controlled, drone swarming software for the US military, according to multiple people familiar with the matter. Goldman Sachs Group Inc. has rolled out a new custom basket aimed at navigating the growing upheaval in software stocks, betting on companies perceived to be better insulated from artificial intelligence disruption than others. The US Federal Trade Commission is accelerating scrutiny of Microsoft Corp. as part of an ongoing probe into whether the company illegally monopolizes large swaths of the enterprise computing market with its cloud software and AI offerings, including Copilot. Anthropic PBC has named Chris Liddell to its board of directors, expanding its leadership with a seasoned finance executive who played a key role in taking General Motors Co. public. Blackstone Inc.’s private equity fund for wealthy individuals notched a net 20% gain last year, thanks in part to some artificial intelligence investments the firm doesn’t hold in its institutional portfolios. The Pentagon added Alibaba Group Holding Ltd., Baidu Inc., BYD Co. and TP-Link Technologies Co. to a list of companies that aid the Chinese military – before withdrawing it minutes later without explanation. Pinterest Inc. fell after the company projected current-quarter sales that fell short of Wall Street estimates, the latest in a rocky period marked by layoffs and a pivot toward artificial intelligence products. DraftKings Inc., the online betting company, issued a 2026 forecast for sales and profit that fell short of Wall Street estimates, sending the stock tumbling. Instacart climbed after the company issued a strong outlook for the start of 2026 that far exceeded analyst expectations, signaling sustained demand for its grocery delivery services. Airbnb Inc. climbed after the company posted strong fourth-quarter bookings and issued an upbeat revenue outlook, citing strong travel demand and growing adoption of its new flexible payment and booking options. Rivian Automotive Inc. closed out 2025 with better-than-expected financial results, sending the shares higher ahead of the electric-vehicle maker’s critical debut of its next-generation SUV. Moderna Inc. beat fourth-quarter revenue estimates as its struggling Covid vaccines business declined less than expected. Moderna lashed out at the US Food and Drug Administration for making it harder for companies to create new medicines, escalating a dispute between the vaccine maker and the regulator. Wendy’s Co. rebounded after the chain said sales would be little changed this year, suggesting that the struggling fast food chain has reached a low point. Constellation Brands Inc., the owner of the Modelo brand in the US, named Nicholas Fink its next chief executive officer as the company looks for new ways to spur growth amid a drop in the beer business. Toyota Motor Corp. is safeguarding its nearly $1 billion investment pledge to air taxi maker Joby Aviation Inc. by troubleshooting production processes and mulling a deeper manufacturing role. Capgemini Chief Executive Officer Aiman Ezzat said the French IT company is “clearly pivoting” to facilitate artificial intelligence adoption, which will fuel sales this year. DP World Ltd. Chief Executive Officer Sultan Ahmed Bin Sulayem resigned, one of the most influential businesspeople to be felled by his involvement with the disgraced financier Jeffrey Epstein. Sanrio Co., the Japanese company behind Hello Kitty, surged to its daily limit in Tokyo Friday, after posting stronger-than-expected earnings and lifting full-year guidance. Meituan warned of hefty losses in 2025 as intense industry competition in China’s food-delivery market took a toll on its bottom line. Some of the main moves in markets:

Stocks

The S&P 500 rose 0.6% as of 1:30 p.m. New York time The Nasdaq 100 rose 0.8% The Dow Jones Industrial Average rose 0.5% The MSCI World Index rose 0.3% Bloomberg Magnificent 7 Total Return Index fell 0.3% Philadelphia Stock Exchange Semiconductor Index rose 1.3% IShares Expanded Tech-Software Sector ETF rose 2.6% The Russell 2000 Index rose 1.9% S&P 500 Equal Weighted Index rose 1.4% Currencies

The Bloomberg Dollar Spot Index was little changed The euro was little changed at $1.1875 The British pound rose 0.2% to $1.3650 The Japanese yen was little changed at 152.83 per dollar Cryptocurrencies

Bitcoin rose 4.9% to $69,010.01 Ether rose 6.9% to $2,054.03 Bonds

The yield on 10-year Treasuries declined four basis points to 4.06% Germany’s 10-year yield declined two basis points to 2.75% Britain’s 10-year yield declined four basis points to 4.42% The yield on 2-year Treasuries declined four basis points to 3.42% The yield on 30-year Treasuries declined three basis points to 4.70% Commodities

West Texas Intermediate crude rose 0.5% to $63.16 a barrel Spot gold rose 2.2% to $5,030.18 an ounce ©2026 Bloomberg L.P.