At this point, Americans and investors have gotten the message: inflation may be moderating, but it’s still high.
Economists predict later this morning, the November Consumer Price Index will show prices rose 0.3% over the prior month and 7.3% over the prior year. These increases would mark a slowdown from the 0.4% monthly rise and 7.7% annual increases seen in October.
In response, the Federal Reserve will keep raising interest rates to fight inflation. But, like inflation, these rates hikes will come at a slower rate – investors expect the Fed will announce a 0.5% increase in its benchmark interest rate tomorrow, down from its prior pace of 0.75%.
A hotter reading could trigger a selloff in stocks, on the perception that the Fed needs to keep raising rates by more, or for longer, than anticipated. A cooler read could spark a rally.
Certainly, components of inflation have been moderating. Apparel prices have fallen for two months straight, and that trend could continue. (Email inboxes stuffed with promotions offer a hint.) Gasoline prices have been waning. Rents showed the smallest monthly gain in October since July, but that might not last, say economists. However, economists underestimated the change in inflation in five of the last seven months, according to Bloomberg.
Though not all investors are convinced either outcome matters much.
“First, the CPI is one of the most backward looking data series and tells us little about where inflation is heading,” wrote Mike Wilson, chief U.S. equity strategist t Morgan Stanley, in a note to clients. “Second, given how well telegraphed the Fed is with its moves, the CPI release is very unlikely to change its decision to raise 50bps [this] week or its forecasts for next year in a meaningful way.”
Instead, Wilson is more concerned about an earnings slowdown, and says stocks haven’t priced that in.
Still, stocks have rallied from their lows, with the S&P 500 up more than 10% since mid-October. The yield curve, meanwhile – specifically the difference in yields on 10-year and 2-year Treasury bonds – remains in inversion, signaling the view that the U.S. will not avoid a recession.
“When the stock market and bond market diverge, I tend to put my money where the bond market is,” said Interactive Brokers Chief Strategist Steve Sosnick in an interview with Yahoo Finance.
On balance, market participants are more worried about unhappy surprises.
Deutsche Bank’s 2023 Global Market Survey, released this week, found “higher than expected inflation” was seen as a large threat to market stability, second only to “recessions prove more severe than expected.” Of course, these two risks are connected.
But as investors round out what’s been a gloomy year, not everyone is so sure a continued fixation on mitigating downside risks will be the most productive stance going forward.
“I don’t really see a lot of people talking about upside risks,” Max Kettner, chief multi-asset strategist at HSBC, told Yahoo Finance. “Like, what could actually go right?”
And a continued slowdown in inflation would at least help start to tell that story.News Source: Yahoo Finance