Inflation

The January CPI report, released February 13th, delivered the clearest evidence yet that the post-pandemic inflationary era is entering its final chapter. Headline CPI rose 0.2% MoM and 2.4% YoY, undershooting consensus estimates of 0.3% MoM and 2.5% YoY—a meaningful downside surprise that marks the lowest annual reading since May 2021. Core CPI (excluding food and energy) printed 0.3% MoM and 2.5% YoY, also below prior expectations. The deceleration was broad-based: energy costs declined, used vehicle prices fell sharply, and shelter/OER—which had been the most persistent engine of inflation—showed further moderation. The trajectory now stands at a meaningful step-down from December's 2.7% headline and the 3.0% peak logged in September 2025, following the tariff disruptions that roiled pricing through mid-year.

One important caveat deserves institutional attention: the government shutdown of late 2025 (43 days) forced the BLS to use a carry-forward methodology for October and partial November CPI data. Economists across the sell side have flagged that this imparts a downward bias on inflation readings through approximately April 2026, when fresh collection data will normalize the series. This does not invalidate the current print—it reflects genuine disinflation—but it does mean the precise magnitude of the trend cannot be fully confirmed until Q2 data clears the methodology distortion. The Fed is aware of this caveat and it reinforces the committee's data-dependent posture.

From a monetary policy standpoint, the January CPI provides meaningful progress toward the Fed's 2% objective, but the committee's January 28th decision to hold rates at 3.50–3.75% underscored that a single favorable print does not constitute the sustained confidence the FOMC requires. Fed Governor Michael Barr stated on Tuesday that rates should remain unchanged until there is greater confidence inflation is moving sustainably toward target. Chicago Fed President Austan Goolsbee offered a more conditional tone, suggesting additional cuts remain possible if price pressures continue to ease. Markets have translated this into a 92% probability of no action at the March 17–18 meeting and have converged on June as the most likely window for the first cut of 2026, with roughly 62 basis points of total easing priced through year-end—consistent with two quarter-point cuts and a roughly 50% probability of a third.

Risk and Positioning

Tuesday's session reflected a distinctly mixed but modestly risk-on posture: the S&P 500 gained +0.10% while the VIX dropped a substantial -7.78% to 19.55, reversing a portion of the anxiety that had built up over the prior week's AI-related technology rotation concerns. The dual dynamic of flat-to-marginally-positive equity performance paired with a sharp volatility compression suggests that investors are reducing hedges rather than aggressively adding risk—a measured reset rather than a conviction-driven rally. The VIX at 19.55 remains well above its December 2025 52-week low of 13.38, signaling that uncertainty has not fully abated despite the inflation tailwind.

Equity market internals reveal an important bifurcation. Financials outperformed meaningfully—JPMorgan Chase gained +1.5% and Citigroup surged +2.7% following Fed Governor Barr's signal that rates may remain restrictive for an extended period, which reinforces net interest margin expectations for banks with significant deposit franchises. Within technology, the picture was more nuanced: selective positioning within AI leaders drove gains in Nvidia (+1.2%), Apple (+3.2%), and Broadcom (+2.3%), while richly valued software names continued to face valuation-driven selling pressure, with Salesforce -2.9%, Intuit -5.1%, and Oracle -3.8%. This divergence is consistent with a market that is differentiating between companies with tangible AI-driven revenue and those still carrying multiple-expansion premiums without earnings delivery. The S&P 500 forward P/E sits at approximately 22x as of February 17th—elevated relative to the 19x historical average—suggesting the index remains priced for execution.

From a defensive positioning lens, the VIX compression and Treasury yield stabilization at 4.05% suggest the acute risk-off episode triggered by early-February AI disruption concerns (likely related to DeepSeek-style competitive dynamics) has partially resolved. The 10-year yield at 4.05% represents its lowest level since early December, with the decline driven by the soft CPI print rather than growth fears—a qualitatively different dynamic than a recessionary flight-to-safety. Gold's continued elevation and the DXY's tentative stabilization around 97 reflect residual geopolitical uncertainty, particularly around ongoing U.S.–Iran indirect nuclear negotiations and the Greenland-related 'Sell America' trade that pressured USD earlier in January.

Sector and Cross-Asset Analysis

Tuesday's sector performance was headlined by financials, which benefited from the twin tailwinds of rate-restrictive Fed rhetoric (supportive of net interest margins) and relief from peak volatility. The broader narrative within equities reflects a market in active rotation: technology's gains were narrow and selective, concentrated in semiconductor and AI hardware names rather than the software cluster, which continued its multi-week drawdown. Walmart's -3.9% decline and broader consumer staples pressure suggest investors are discounting softer near-term consumption amid lingering affordability headwinds for lower-income cohorts—a K-shaped dynamic that has characterized the 2025–2026 cycle. Nike's +2.5% gain within the Dow was an outlier, likely driven by company-specific positioning rather than a broad consumer discretionary re-rating.

On the cross-asset front, the interplay between Treasuries and equities remained constructive. The 10Y yield's consolidation at 4.05%—the lowest level since early December—has eased the discount rate pressure on long-duration equity valuations, providing a selective tailwind for high-multiple growth companies where future cash flows are most rate-sensitive. International equity markets outperformed Tuesday: European indices including the DAX (+0.56%), FTSE (+0.58%), and FTSE 100 were all higher, continuing the year-to-date dynamic where European markets have benefited from expectations of faster ECB easing relative to the Fed. The dollar's marginal stabilization around 97—recovering from its January 5-year lows near 95.55—reflects a tentative equilibrium as strong U.S. payrolls data balances the dovish impulse from softer inflation.

In credit, the broader backdrop remains constructive but not unambiguously risk-on. High yield spreads, while not spiking, have widened modestly from Q4 2025 tights as AI-related tech earnings dispersion and selective consumer stress create idiosyncratic credit events. Investment grade credit continues to perform well given the rates tailwind. The 2s10s yield curve, which has been re-steepening from inversion as rate-cut expectations for 2026 are pulled forward, supports financials' earnings trajectory. The Russell 2000 was essentially flat on Tuesday (-0.00%), underscoring that the rate relief has not yet been sufficient to meaningfully rerate small-cap equities that are more dependent on floating-rate financing.

Economic Data & Events

Today's Calendar

• 6:30AM MT - Housing Starts & Building Permits - Moderate Impact
• Housing Starts Estimated 1.31M | Previous 1.246M
• Permits Estimated 1.40M | Previous 1.411M
• 6:30AM MT - Durable Goods - Moderate Impact
• Durables Estimated -1.7% | Previous +5.3%
• Core Estimated +0.3% | Previous +0.4%
• 7:15AM MT - Industrial Production - Moderate Impact
• 8:00AM MT - FOMC January Meeting Minutes - Moderate Impact