Investors are optimistic about this week’s happenings but were the Monday celebration for the CPI and stock market’s positive trend too early?
Wall Street ended the day in a happy mood, with major market indexes posting significant gains. The Dow Jones Industrial Average (DJI 1.58%), S&P 500 (GSPC 1.43%), and Nasdaq Composite (IXIC) all concluded with gains of more than 1% as investors appeared to be anticipating strong news coming out over the course of the week.
There are two occurrences in particular that investors appear to believe will benefit them. The Bureau of Labor Statistics will announce the latest Consumer Price Index readings for November on Tuesday morning, and market investors will be looking intently to see if inflation continues to slow. Indeed, the Federal Reserve will be keeping an eye on the CPI report as it begins two days of deliberations that will end in a decision on short-term interest rates on Wednesday afternoon.
Will prices continue to rise?
The first important piece of information for investors will be the CPI data, which will be released on Tuesday at 8:30 a.m. ET. With so much at risk, a favorable result will be critical if the stock market is to maintain its upward trend that began on Monday.
Economists predict that the monthly CPI will rise between 0.3% and 0.4%. This would result in a 7.3% year-over-year increase in the price index, slightly slower than the 7.7% advance between October 2021 and October 2022.
The food and energy categories account for a sizable share of the volatility in this indicator of consumer prices. Notably, fluctuations in key commodity prices, such as gasoline, frequently have severe effects on monthly pricing data, thus many investors exclude those two categories and instead focus on what they term the “core” CPI. Economists predict a 0.3% rise in the core CPI, implying that the index would have climbed by 6.1% year on year, somewhat less than the 6.3% annual growth seen in October 2022.
Market participants will dig further into the figures, focusing on a few components of the report. First, if goods prices moderate while service prices continue to grow substantially, it may raise concerns that wage increases will make it more likely that inflation rates beyond the Fed’s 2% objective will become entrenched. Extreme surprises in any direction might also influence forecasts for what the Fed will do later this week, which could move markets.
Will the Fed continue to raise interest rates?
Investors are reasonably certain that the Federal Reserve’s monetary policy committee will raise interest rates when it meets on Tuesday and Wednesday. The unanswered concerns are how much of a rate hike the Fed will likely make and what indications it will likely convey to help markets anticipate what will happen in 2023.
The December Fed meeting comes after four consecutive quarter-point increases, but the consensus is that the central bank will moderate its pace of rate hikes and settle for a half-point increase this month. The federal funds rate will still rise to a new range of 4.25% to 4.5%, its highest level since 2007. Nonetheless, a sizable minority of market players anticipate a fifth consecutive three-quarter-point increase, to a new range of 4.5% to 4.75%.
The Fed’s purpose in raising interest rates so quickly has been to squash inflation before it becomes entrenched. Whatever it does this month, there will be a lag between its monetary policy actions and their impact on prices.
Normally, the Fed would be confronted with the dilemma that aggressive rate rises increase the likelihood of a recession. However, market investors understand that the central bank would not back down, even if it means harming the economy. To have a clearer idea of what to expect in 2023, investors should comprehend the complexities of the language used by the Fed in projecting its future course of action.
Counting on a favorable outcome
With today’s market advances, investors appear to be anticipating lower CPI data and a smaller rate hike on Wednesday. Those expectations aren’t unrealistic, but they provide room for disappointment if the numbers don’t pan out.
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