CPI hotter than expected. Market reaction is muted.
Ahead of the CPI update for December, US stock indices inched higher, building on Wednesday’s gains. The S&P 500 was testing resistance around the 4,800 area which is within spitting distance of its record intra-day high of 4,818, hit at the beginning of January 2022. If it can top this level, then it will join the Dow and the NASDAQ 100 in making fresh record highs in the last fortnight.
The S&P has done well to make recent gains given comments from individual Fed members, and the release of minutes of the December monetary policy meeting released last week. The latter indicated that the Fed had no pathway laid out for rate cuts this year, even though it predicts they are coming. Yesterday, senior FOMC member John Williams said that there’s still some work to do to get inflation down to the Fed’s 2% target. This will require the continuation of the Fed’s current restrictive policy stance for some time. He believes that the outlook remains uncertain and rate decisions are to be made meeting-by-meeting. He noted that the Fed is fully aware that it must steer a course between cutting too soon and risking a bounce-back in inflation, and being too restrictive and triggering a recession.
Today we got the latest update on US inflation with the release of December CPI. Many bullish investors hoped that this could be the catalyst to push equities higher, and drive the S&P 500 to a fresh record, and beyond. But CPI came in hotter than expected, and at the time of writing, the S&P has pulled back from its best levels. Headline CPI rose 3.4% year-on-year, above both expectations of a 3.2% increase and November’s +3.1% reading. Things were a touch better for the Core reading. This rose 3.9%, which was a small improvement on the prior month’s +4.0%, but was also a touch worse than the +3.8% expected.
According to the CME FedWatch Tool, the probability of a 25 basis point cut in March has dropped a touch, but is still high at 64%, down from 67% prior to the announcement. It remains the case that the market is pricing in 150 basis points (bps) of cuts this year. In contrast, the Fed’s forecast is for a 75 bps reduction. On the face of it, the larger the rate reduction, the more bullish for equities. However, 150 bps would suggest that the US economy requires desperate life support, while the Fed’s prediction of 75 bps is consistent with an economic soft landing.
Ahead of the open, US stock indices are proving very resilient. The post-CPI sell-off has been mild so far today, and a rebound can’t be ruled out.
The S&P has done well to make recent gains given comments from individual Fed members, and the release of minutes of the December monetary policy meeting released last week. The latter indicated that the Fed had no pathway laid out for rate cuts this year, even though it predicts they are coming. Yesterday, senior FOMC member John Williams said that there’s still some work to do to get inflation down to the Fed’s 2% target. This will require the continuation of the Fed’s current restrictive policy stance for some time. He believes that the outlook remains uncertain and rate decisions are to be made meeting-by-meeting. He noted that the Fed is fully aware that it must steer a course between cutting too soon and risking a bounce-back in inflation, and being too restrictive and triggering a recession.
Today we got the latest update on US inflation with the release of December CPI. Many bullish investors hoped that this could be the catalyst to push equities higher, and drive the S&P 500 to a fresh record, and beyond. But CPI came in hotter than expected, and at the time of writing, the S&P has pulled back from its best levels. Headline CPI rose 3.4% year-on-year, above both expectations of a 3.2% increase and November’s +3.1% reading. Things were a touch better for the Core reading. This rose 3.9%, which was a small improvement on the prior month’s +4.0%, but was also a touch worse than the +3.8% expected.
According to the CME FedWatch Tool, the probability of a 25 basis point cut in March has dropped a touch, but is still high at 64%, down from 67% prior to the announcement. It remains the case that the market is pricing in 150 basis points (bps) of cuts this year. In contrast, the Fed’s forecast is for a 75 bps reduction. On the face of it, the larger the rate reduction, the more bullish for equities. However, 150 bps would suggest that the US economy requires desperate life support, while the Fed’s prediction of 75 bps is consistent with an economic soft landing.
Ahead of the open, US stock indices are proving very resilient. The post-CPI sell-off has been mild so far today, and a rebound can’t be ruled out.
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