Stocks rose in the run-up to key inflation data that may show further deceleration, bolstering the case for a downshift in the pace of Federal Reserve rate hikes.
(Bloomberg) — Stocks rose in the run-up to key inflation data that may show further deceleration, bolstering the case for a downshift in the pace of Federal Reserve rate hikes.
In another relatively subdued trading session, the S&P 500 posted a mild advance. While the market looks slightly tilted toward a risk-on mood, the reality is that many traders will likely be sitting on their hands on the eve of the pivotal consumer price index. Treasury two-year yields and the dollar fluctuated.
“Inflation readouts have become the most important government data, usurping even the monthly jobs numbers,” said Arthur Hogan, chief market strategist at B. Riley Wealth. “An in-line or softer-than-expected CPI will likely result in a rally, whereas a hotter number could easily tip over the applecart. Good news for the economy can become good news for markets.”
Thursday’s report is expected to show core inflation, which excludes food and energy and is seen as a better underlying indicator than the headline measure, increased 5.7% from a year earlier. While that helps explain policy makers’ intention of keeping rates higher for longer, year-over-year price growth is moderating.
The caveat is that if the headline print drops, but core CPI doesn’t, the number won’t be that positive, wrote Tom Essaye, a former Merrill Lynch trader who founded The Sevens Report newsletter.
Another aspect is that the market’s focus on the change in prices rather than the level of inflation could be problematic as far as monetary policy goes, according to Torsten Slok of Apollo Global Management.
The market would conclude that “inflation is coming down, so everything is fine and we can trade stocks higher and credit spreads tighter,” Slok added. “But this is a problem for the Fed because the Fed is worried that easier financial conditions will delay further the move in inflation back to 2%.”
To Brian Overby, senior markets strategist at Ally, one thing to keep in mind is that stocks have already rallied somewhat off the lows, so we are not as coiled for as bullish of a bounce as we got following recent reports.
“The concern is that a move higher could be a ‘sell the news’ event as earnings come into focus Friday,” he noted.
As traders get ready for the start of the bank fourth-quarter earnings season on Friday, there’s a sense they will be less interested in seeing how robust profits were and more focused on signs the industry is girding for a major downturn as rate increases crimp economic activity.
Pacific Investment Management Co., which oversees roughly $1.7 trillion in assets, says that while a recession could further challenge riskier assets like stocks, “we continue to see a strong case for investing in bonds, after yields reset higher in 2022 and with an economic downturn looking likely in 2023.”
Key events this week:
- US CPI, initial jobless claims, Thursday
- St Louis Fed President James Bullard at Wisconsin Bankers Association virtual event, Thursday
- Richmond Fed President Thomas Barkin speaks at VBA/VA Chamber, Thursday
- China trade, Friday
- US University of Michigan consumer sentiment, Friday
- Citigroup, JPMorgan, Wells Fargo report earnings, Friday
This week’s MLIVE Pulse Survey:
Some of the main moves in markets:
Stocks
- The S&P 500 rose 0.5% as of 10:42 a.m. New York time
- The Nasdaq 100 rose 0.6%
- The Dow Jones Industrial Average rose 0.1%
- The Stoxx Europe 600 rose 0.5%
- The MSCI World index rose 0.5%
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro rose 0.4% to $1.0772
- The British pound fell 0.1% to $1.2139
- The Japanese yen fell 0.1% to 132.42 per dollar
Cryptocurrencies
- Bitcoin fell 0.6% to $17,361.13
- Ether fell 1% to $1,325.25
Bonds
- The yield on 10-year Treasuries declined four basis points to 3.57%
- Germany’s 10-year yield declined eight basis points to 2.23%
- Britain’s 10-year yield declined 17 basis points to 3.38%
Commodities
- West Texas Intermediate crude rose 1.9% to $76.53 a barrel
- Gold futures were little changed
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Isabelle Lee, Emily Graffeo and Vildana Hajric.
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