US CPI Hits New High, Markets Benefit Amid Inflation Woes

US inflation remains a major concern, with the latest Consumer Price Index (CPI) showing a 3% year-over-year increase in January, surpassing expectations. However, Bank of America’s Michael Hartnett suggests that this rising CPI could actually benefit both bond and stock markets. Hartnett argues that the persistent inflation puts Trump in a vulnerable position, forcing him to implement more cautious policies on tariffs and immigration to avoid triggering a second wave of inflation.

 

Hartnett also highlights the challenges facing the Federal Reserve. Despite rising inflation, the Fed’s asymmetric policy (rapid rate cuts compared to hikes) and lack of credibility on inflation make fiscal adjustments more difficult. This could complicate the US government's fiscal policy

 

With the US budget deficit rising 25% in the past four months to $840 billion, Hartnett sees this as a sign of accelerating government spending. He believes Congress will likely pass two reconciliation bills rather than one, reducing the chances of large cuts to defense spending.

 

On the investment front, Hartnett maintains his positive outlook on international markets and bond yields. He expects 30-year US Treasury yields to peak at 5%, with limited downside risk below 4%. He also sees international equities as an opportunity for 2025, particularly Chinese tech stocks like Baidu, Alibaba, Tencent, and Xiaomi, which have outperformed US stocks since January. Gold continues to rise, recently hitting a historic high above $2900.