Why Thursday’s US CPI report may kill the stock market’s hope that inflation will melt away

A mild rally in the stock market to start the new year will be put to the test on Thursday when investors face the long-awaited US inflation reading that could help determine the size of the next Fed rate hike.

The December CPI reading from the Bureau of Labor Statistics, which tracks changes in the prices consumers pay for goods and services, is expected to show a 6.5% increase from a year earlier, slowing from 7.1% year over year. the previous month, according to a survey of economists conducted by Dow Jones. A core price measure that excludes volatile food and fuel costs is expected to have increased 0.3% from November, or 5.7% on an annual basis.

See also: Inflation is slowing, CPI to show. But is it slowing fast enough for the Fed?

December CPI will be especially important for influencing the Fed’s decision at its next meeting that ends February 1, according to economists at Pimco. They expect inflation and Labor market data It will be moderate enough that the central bank will pause interest rate hikes before the May meeting.

“After raising 50 basis points at the December meeting, we expect the Fed to move to a 25 basis point hike pace in early February, eventually stopping at 5%,” Pimco economists Tiffany Wilding and Alison Boxer wrote in a note on Tuesday.

However, since the Fed’s December meeting, officials have relentlessly indicated that the central bank will need to raise interest rates above 5% In order to get inflation to the 2% target, with no interest rate cuts expected this year. Traders of Fed fund futures now see a 78% chance of a 25 basis point hike at the February meeting, and another 68% chance in March, which would push the final interest rate to just 4.75-5% by mid-year, according to the Fed. CME FedWatch tool.

MarketWatch Live: US stocks book more gains on the day ahead of the inflation report

After, after Two lower-than-expected CPI readingsthat It gave the market hope that inflation would fade quicklysaid Michael J. Kramer, founder of Mott Capital Management, said in a note on Monday that the December reading of inflation is necessary to maintain market hopes for lower inflation.

“Inflation swaps are currently seeing inflation fall below 2.5% by the summer of 2023, which sounds optimistic,” Kramer said. “This week’s CPI reading will be essential in maintaining that view and could be disastrous if the CPI comes out higher than expected, derailing market-based inflation expectations.”

Reece Williams, chief strategist at Spouting Rock Asset Management, said the stock market is looking for a “around 5%” increase in core inflation for December. “If you get a number in the low four [percent], the stock market will continue to rise. The market is very focused on data points.”

US stocks had a positive start to 2023 on hopes that cooling inflation and a potential recession will convince the central bank to ease up on rate hikes.

We see: ‘Year of two halves’: Stifel’s Barry Bannister expects near-term rally in US stocks – and trouble later in 2023

Williams believes inflation is declining but will not reach the central bank’s 2% level by summer 2023.

“I think the markets are going to realize at some point, ‘Oh we can’t get to 2%,’ and then maybe the markets will sell that. I think maybe in the short term [the stocks go] Williams told MarketWatch over the phone:

US stock indices It closed higher on Wednesday. S&P 500 SPX Index,
rose 1.3%, while the DJIA Dow Jones Industrial Average rose,
gained 0.8% and the Nasdaq Composite,
an advance of 1.8%.

Leave a Reply

Your email address will not be published. Required fields are marked *