It’s been a while since a red-hot inflation report triggered wild swings in U.S. stocks, as has often been the case in 2022, but that doesn’t mean the Consumer Price Index Tuesday for October is intended to be a snooze party for the markets.
Instead, some Wall Street analysts say it’s possible, even likely, that the October CPI report will emerge as a key catalyst for stocks, with the potential to propel the market higher over a lower figure than expected.
At least one leading economist expects data to show consumer prices remained largely unchanged last month, if not falling.
“I wouldn’t be surprised to see negative CPI inflation for October,” Neil Dutta, head of economics at Renaissance Macro Research, said in an emailed comment to MarketWatch.
“After all, retail gasoline and heating oil prices fell just over 10% during the month and we know that energy, although a small share of the total CPI, around 7%, can represent a large portion of the CPI from month to month. monthly fluctuations in the CPI.
Markets at a crossroads
The October CPI report comes at a critical time for markets. Investors are trying to anticipate whether the Federal Reserve will follow through with another interest rate hike, as it indicated in its latest set of projections, released in September.
Speaking Thursday, Federal Reserve Chairman Jerome Powell left the door open for another decision, but qualified that decision — as the Fed almost always has — by insisting that whatever The Fed’s decision will ultimately depend on the data.
Those comments added even more importance to next week’s data, Thierry Wizman, Macquarie’s global foreign exchange and interest rate strategist, said in an emailed comment to MarketWatch on Friday.
“Our own view – expressed in recent days – is that the Fed – and by extension the fixed income markets – will not anticipate. Rather, the Fed will be very responsive to the data,” he said. “The next step is… the CPI. This should have a calming effect on markets, as traders weigh the possibility that a very low overall CPI result will further dampen the prospect of excessive wage demands in the labor market.
Asymmetric risks
While assessing the potential impact of a subdued inflation report next week, at least one market analyst expects the market reaction to the June CPI report, released July 12, can serve as a useful model.
Stocks hit their highest levels of the year during the month as many interpreted the slower-than-expected price rise as an important turning point in the Fed’s fight against inflation. The S&P 500 recorded its 2023 closing high on July 31, according to FactSet data,
Tom Lee, who anticipated both the outcome of the June CPI report and the market reaction, told MarketWatch that at this point, inflation would have to reaccelerate significantly to have a negative impact on the market stock market.
The bottom line is that risks for investors heading into Tuesday’s report are likely tilted to the upside. Even a slightly higher-than-expected reading probably wouldn’t be enough to derail the market’s November rebound. A weak reading could reinforce expectations that the Fed is finished raising rates, likely precipitating a rally in stocks and bonds.
“I would say the setup looks pretty favorable,” Lee said.
Even a slightly higher-than-expected reading probably wouldn’t be enough to derail the market’s November rebound.
“I think the reaction function is changing for the stock market,” Lee said.
“Because the Federal Reserve and the public market considered the September CPI to be a pretty decent number, and Powell even called it such. Earlier in 2023, I think people would have considered this a failure.
U.S. inflation has fallen significantly since peaking at more than 9% year-on-year last summer, the highest rate in four decades. Data released last month showed that consumer prices rose 0.4% in September, lower than the previous month’s 0.6% rise, but still slightly higher than expected.
However, the more closely watched “core” figure reflected only a 0.3% increase, which was in line with expectations.
How long will the “last mile” take?
There is a perception on Wall Street and within the Federal Reserve that bringing inflation down from 3% to the Fed’s 2% target could pose more challenges for the Fed. After all, most of the easing from last summer’s highs is due to falling commodity prices and supply chain normalization as the economic impact of the pandemic of COVID-19 has faded.
Powell has repeatedly warned of a “bumpy ride” and he reiterated Thursday that the battle against inflation is far from over.
See: Powell says Fed wary of inflation ‘deceptions’
Inflation data released this month and in the coming months could help set investors’ expectations for how long that “last mile” will last, helping these reports regain their importance to markets.
“I like a quiet market, but I think CPI is more and more in focus these days now that we’re getting closer to that 2% target,” said analyst Callie Cox. in US investments at eToro, during a phone call with MarketWatch.
Since the start of 2023, the S&P 500 index has not seen a single move of 1% or more on CPI release day, according to FactSet data. For comparison, the biggest daily swings seen in 2022 occurred on CPI-watched days, with the large-cap index sometimes swinging 4% or more in a single session.
Economists surveyed by FactSet expect consumer prices to have risen 0.1% in October, following a 0.4% rise in September. They expect underlying prices to rise 0.3%, which excludes volatile food and energy products. Powell said he was closely monitoring core inflation, as well as so-called “supercore” inflation, which measures inflation in the cost of services other than housing.
To be sure, the CPI report isn’t the only news that could influence the market in the coming week. Investors will also receive a monthly Treasury update including data on foreign purchases and sales of Treasuries, as well as a host of other economic reports, including potentially securities market-moving readings. real estate and manufacturing activity.
There is also the producer price index, another closely watched inflation barometer, which is due to be released on Thursday.
U.S. stocks have risen sharply since early November, with the S&P 500 SPX up more than 5.3%, according to FactSet data.
