Three Cuts or Two? Markets Test the Durability of Disinflation

Kalshi flipped to three. Polymarket hesitated. Bitcoin rallied. Equities stalled. The question is not whether inflation cooled. It is whether the cooling holds.

Markets entered Friday positioned for an inflation surprise. They got moderation instead.

January CPI rose 0.2% month over month and 2.4% year over year, undershooting consensus. Core inflation came in at 2.5% annually, in line with expectations but still drifting lower. 

Treasury yields dropped sharply, with the 10-year sliding toward 4.06% and the two-year falling below 3.43%.

Rate-cut probabilities moved immediately. Futures markets lifted the odds of three cuts in 2026. Kalshi flipped its favorite contract from two cuts to three. Polymarket did not fully follow, leaving two cuts marginally ahead at 27% versus 25% for three.

Risk assets reacted unevenly.

Bitcoin rallied nearly 5%, reclaiming the upper $60,000s. Small caps surged, with the Russell 2000 up more than 1.5% intraday. Utilities extended a record-setting run, marking their seventh consecutive day of gains.

And yet, the major indices struggled to hold momentum. The S&P 500 and Dow oscillated between gains and losses. The Nasdaq remained pressured and is on track for one of its longest weekly losing streaks since 2022. The VIX held above 20.

The market did not reject disinflation. It questioned its durability.

Investor Signal

When softer inflation produces cross-asset divergence instead of unified risk-on behavior, the regime is not changing. It is being tested.

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The most important move of the day was not in equities. It was in the modal rate path.

Kalshi’s most likely outcome for 2026 shifted from two cuts to three. That is not a minor statistical move. It represents a re-anchoring of expectations.

But Polymarket did not fully confirm. Two cuts remained slightly ahead.

That divergence inside prediction markets matters.

It tells us conviction is forming but not yet dominant.

In traditional markets, this manifested as partial repricing. Yields fell. Rate-sensitive assets rallied. But growth leadership did not reassert itself. Technology remained fragile. Amazon is still in a bear market. AI-sensitive sectors remain under pressure.

Markets are willing to entertain further disinflation. They are not yet underwriting a sustained easing cycle.

Investor Signal

When the favorite outcome changes but consensus does not fully align, positioning begins before narrative consolidation.

The internal structure of Friday’s rally was instructive.

Utilities hit all-time highs. Homebuilder ETFs outperformed as mortgage-sensitive assets responded to falling yields. 

The equal-weight S&P 500 dramatically outpaced the cap-weighted version, with more than 400 stocks advancing.

Small caps rallied strongly.

Meanwhile, mega-cap tech lagged. Communication services underperformed. Software names remain vulnerable to AI disruption narratives.

Gold climbed more than 2%. Silver surged over 4%.

Bitcoin rallied hard.

This is not broad enthusiasm. It is duration sensitivity.

Lower yields are lifting assets tied to cost of capital. They are not restoring confidence in long-duration growth multiples.

Investor Signal

A rally led by rate-sensitive sectors rather than growth leadership signals repricing of duration, not repricing of expansion.

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Even as CPI cooled, structural pressures did not vanish.

AI disruption fears continue to ripple through software, logistics, and media. 

Pinterest collapsed on weak guidance. Amazon extended its slide into bear market territory. Freight stocks remain volatile after AI-driven efficiency headlines wiped out billions in market value.

Steel and aluminum producers whipsawed on tariff ambiguity. Restaurants warned of persistent beef inflation. Services costs rose at their fastest monthly pace in a year, even as headline CPI softened.

Goldman Sachs saw leadership turnover amid reputational noise. Supreme Court tariff rulings loom. Global oil dynamics shifted as Venezuela revenue policy changed and OPEC+ signaled possible output increases.

This is not a clean macro environment.

It is layered.

Investor Signal

Disinflation can coexist with sector-level fragility. Markets are parsing which risks are cyclical and which are structural.

The question is no longer whether inflation is falling.

The question is whether the fall is stable enough to justify three cuts.

CPI at 2.4% is progress. Core at 2.5% is improvement. But services inflation remains sticky. Labor remains resilient. Wage growth has slowed but not collapsed. AI investment remains massive. Capital expenditure across mega-cap tech is still elevated.

If disinflation is durable, yields continue to drift lower. Small caps extend. Utilities hold leadership. Bitcoin sustains recovery.

If it is fragile, a single hotter print or stronger wage signal will reverse the repricing quickly.

Markets are not repricing growth direction broadly. They are repricing the persistence of cooling.

Investor Signal

When rate expectations shift on marginal data, durability becomes the new volatility driver.

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The Week That Tests the Test

Kalshi flipped.
Polymarket hesitated.

Bitcoin committed.
Equities stalled.

Utilities surged.
Tech wavered.

The inflation print was not hot enough to break the easing narrative. It was not cold enough to cement it.

The market’s posture now reflects conditional optimism.

Treasury yields are at their lowest levels of 2026. Rate-cut odds are rising. Yet volatility remains elevated and the Nasdaq is still on track for its longest losing streak in years.

That is not contradiction.

That is calibration.

The coming weeks will determine whether this CPI report was confirmation of a durable disinflation trend or a temporary easing inside a still-fragile macro environment.

Markets are no longer asking if inflation peaked.

They are asking if it stays contained long enough to matter.