Markets Daily: Why tomorrow's CPI report is so critical

Donald Trump's economic team is discussing slowly ramping up tariffs, a gradual approach aimed at boosting negotiating leverage while helpin

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Markets Snapshot S&P 500 Futures 5,903.5 +0.49% US 10-Year Treasury Yields 4.774% -0.004 VIX Volatility Index 18.8 -2.03% China's CSI 300 Index 3,820.54 +2.63% Market data as of 05:53 am EST. View or Create your Watchlist Market data may be delayed depending on provider agreements.

Five things you need to know

Donald Trump's economic team is discussing slowly ramping up tariffs, a gradual approach aimed at boosting negotiating leverage while helping avoid a spike in inflation, people familiar with the matter said.  Equity futures are rising. Chinese officials are said to be evaluating a potential option that involves  Elon Musk acquiring the US operations of TikTok if the company fails to fend off a controversial ban on the short-video app. The Los Angeles wildfires could result in losses of as much as $30 billion for insurers. The estimates from Wells Fargo and Goldman Sachs are significantly higher than JPMorgan's forecast last week of about $20 billion. Affiliates of Blackstone, KKR, Apollo Global Management and Charles Schwab are among a dozen investment advisers and brokerages that will collectively pay more than $63 million for failing to track employees' use of unauthorized communications platforms. Japan's 40-year government bond yield reached its highest since its inception in 2007 amid a global debt selloff and expectations that the Bank of Japan will hike interest rates in coming months.

What options are saying about tomorrow's inflation report

Options traders are bracing for fresh bouts of volatility tied to Wednesday's key US consumer price index report. The S&P 500 Index is expected to move 1% in either direction tomorrow, based on the cost of at-the-money puts and calls, according to Stuart Kaiser, Citigroup's head of US equity trading strategy. That's the largest implied move ahead of a CPI print since the regional bank turmoil in March 2023. To put it in perspective, the reading rivals the implied move for Jan. 29 — the Federal Reserve's next upcoming interest-rate decision — and it's higher than the next jobs report, due on Feb. 7. The inflationary theme returned to the fore last week when the jump in December's jobs growth underscored the resilience of the US economy, forcing a cohort of economists to pare their forecasts for interest-rate cuts by the Federal Reserve. Investors are becoming increasingly concerned that Trump's tax and trade agenda will fuel price pressures. Yields on benchmark US 10-year Treasury climbed Monday to 4.8%, capping a more than percentage-point jump since mid-September.  "Given the elevated volatility, a cool CPI number could quickly rally the S&P 500 back above 5,900," said Brent Kochuba, founder of options platform SpotGamma. "We now see some large long put positions below that, so if CPI is hot then we could see the S&P 500's rate of decline increase, which would correspond with a big VIX jump." Wednesday's CPI report, set to be released at 8:30 a.m. in Washington, is forecast to show the core reading — which excludes food and energy costs — to have risen by 0.2% in December from a month earlier, down from 0.3% in November. Traders will get a preview of the inflation picture with today's release of US producer prices. Investors who can look beyond any short-term volatility in stocks may find that they're still the best asset to hold in a climate of stubborn inflationary pressure.  While the likes of gold, Treasury bills and even Bitcoin are touted as inflation hedges, US stocks are the asset class that most consistently beats inflation, according to data compiled by the Goldman Sachs's wealth management investment strategy group: Equities which have outperformed 100% of the time going back to 1926. Home prices have outperformed 90% of the time, while intermediate-duration Treasuries did so three-quarters of the time. At the bottom of Goldman's list were gold and commodities, which bested inflation only 57% and 34% of the time, respectively.  —Jessica Menton and Vildana Hajric

On the move

One of Wall Street's most speculative trades just had some of the froth wiped out in dramatic fashion.  Quantum computing stocks — some of which soared more than 1,000% last year — tumbled after Nvidia's CEO said last week that strong use cases for the technology are probably more than a decade away. The current trading action "rhymes with the dot-com bubble," said Bill Stone at Glenview Trust. "It's hard to make any kind of long-term investment case for quantum right now." The bulls haven't given up all hope: Rigetti Computing is up 6.3% in premarket trading today, while D-Wave Quantum is 10% higher. —Ryan Vlastelica

IPOs at risk

Equities just finished their best two-year run since 1998, an environment that should encourage business owners to pursue stock market listings. Yet the surge in bond yields is threatening to undermine a hoped-for resurgence in IPOs this year. Elevated yields will likely weigh on the valuations of the type of high-growth companies that are looking to sell stock for the first time, since their share prices often hinge on profits that are expected in the years ahead. The pressure may give potential IPO candidates an incentive to hold off. To be sure, historically, the IPO market has been resilient to interest rates at these levels. Treasury yields from 2004 to 2007 were around the same levels as they are today, but IPO activity remained strong. "On an absolute basis, the market was extremely healthy and functioning in the mid-2000s when rates were high," said Steve Parish, co-head of ICR Capital. "What investors don't like is volatility."  —Natalia Kniazhevich

Word from Wall Street "The bond market mini-meltdown and inflation concerns have magnified the focus on tomorrow's CPI report. Another upside surprise would further cement doubts that the Fed will be cutting rates anytime soon." Jim Reid Deutsche Bank strategist

What else we're reading

Chinese banks face cash squeeze as yuan defence adds pressure Dubai is getting a new $56,000-a-year private school from GEMS Reeves' vision for Britain faces fresh peril from market fallout British home buyers to face 100% tax in Spain under Sanchez plan French socialist head says may be near accord with government NYC's new congestion pricing zone sees 7.5% drop in traffic

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