Yes, the softer January CPI meaningfully raises the probability of rate cuts, but it does not automatically guarantee a sustained equity rally. The market reaction depends on why inflation is cooling and what it implies for growth.
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1. Does softer CPI increase rate-cut odds?
Yes, but cautiously.
January CPI rose only 0.2% MoM and 2.4% YoY, below expectations, reinforcing the view that inflation pressures are easing. Markets immediately pulled forward easing expectations, with Treasury yields falling and traders increasing bets on Fed cuts later this year.
Key implications:
Cooling inflation reduces the Fed’s need to keep policy restrictive.
Futures markets now price meaningful probability of cuts beginning around mid-year.
Bond markets reacted first: short-term Treasury yields declined after the release.
However, the Fed is unlikely to rush:
Inflation is still above the 2% target.
Strong labour market data complicates the decision.
Policymakers typically need several months of confirmation before easing.
Interpretation:
CPI improves the path toward cuts, not the timing certainty.
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2. Will the S&P 500 extend gains on rate-cut optimism?
Possible, but not guaranteed.
Historically, equities rally when:
inflation cools, and
growth remains resilient (a “soft landing”).
Cooling CPI already supported equities initially as yields fell and financial conditions eased.
But markets are showing a more nuanced response:
Bullish forces
Lower yields increase equity valuations.
Rate-sensitive sectors benefit.
Liquidity expectations improve risk appetite.
Limiting factors
Analysts note inflation improvement is not yet structural disinflation.
The S&P 500 remains technically constructive but largely range-bound unless growth and earnings confirm strength.
If cuts arrive because growth weakens, equities typically struggle.
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3. The real market question now
Markets are shifting from “Is inflation falling?” to:
> “Is inflation falling because policy worked, or because demand is slowing?”
That distinction determines whether rate cuts become:
Bullish liquidity easing (risk-on rally), or
Defensive recession cuts (equity volatility).
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Bottom line
Softer CPI materially increases the probability of Fed cuts, especially from mid-2026 onward.
The S&P 500 can extend gains, but upside is likely incremental rather than explosive unless earnings and growth remain firm.
Near term, markets may trade in a rates-driven optimism vs growth uncertainty tug-of-war.
In practical terms: CPI removed a major bearish risk, but it has not yet created a clear new bullish regime.
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