Sat, December 02, 2023

Investors Parse Through CPI Data


Released Data Sets Tone for The Anticipated Fed Decision

The smallest monthly gain over a year was recorded by a key gauge of US CPI data, estimating that inflation may have peaked. After figures showed prices climbed less than projected last month, US equities rose, and Treasuries yields fell across the curve. That’s an indication that the Federal Reserve will postpone the pace of rate increases.

Before paring gains, the S&P 500 climbed 2.8%, while the tech-heavy Nasdaq 100 climbed 3.9%. After a key measure of US household costs showed the smallest month advance over a year, the policy-sensitive two-year Treasury yield fell more than 15 basis points. The dollar briefly reversed gains made over two days.

Tuesday’s numbers validate the Fed’s predicted half-point move on Wednesday. The latter were adjusted with the CPI print from the previous month, which was slower than expected. The odds have shifted in favor of a quarter-point increase at the Fed’s February meeting. The swap markets reduce their rate-hike bets.

Some Investors Are Taking a Cautious Approach to The CPI Surprise

Richard Carter is the head of fixed interest research at Quilter Cheviot. He claimed that “while the war against inflation is turning, we are a long way off declaring victory, and the Fed will keep its hawkish stance for a while longer, even if it does potentially force a recession.”

James Athey is the investment director at Aberdeen. He points out that the CPI data fueled stock rally ignores how corporate earnings are just beginning to feel the impact of tight monetary policy.

He claims that “as the full effects of the Fed’s aggressive actions this year play out next year, it seems inevitable that we will see a significant repricing lower in EPS forecasts and thus the broad market.”

The European Central Bank (ECB) should announce its interest rate decision on Thursday. The Bank of England will play a role in markets. Followed by monetary authorities in Mexico, Norway, the Philippines, Switzerland, and Taiwan, they will all play a role in markets.


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