- Investors are watching a busy week, juggling November inflation data, the Fed’s policy decision and its updated rate outlook.
- Among the three things to watch will be underlying inflation, which could reflect growth in services activity.
- Stocks appear to be “hovering” between two potential outcomes for the November CPI.
Equity investors could be hit with another bout of volatility next week, with the latest inflation report arriving just before the Federal Reserve releases its final interest rate decision in 2022, supporting the question of whether how far the Fed will raise interest rates further to further cool-burning consumer prices.
The data and the meeting will land as stocks hit October lows, reflecting market expectations for lower rate hikes from this month. Friday’s wholesale inflation for November may have underscored that inflationary pressures remain in flux, with the monthly rise in food prices contributing to the PPI increase at a stronger than expected pace of 0.3%.
November’s Consumer Price Inflation Index from the Labor Department is due Tuesday and the policy decision from the Federal Open Market Committee is scheduled for Wednesday.
“We’ve had a few weaker data points over the past six to eight weeks. But for most of this cycle, it’s been a story of upside surprises on inflation and core inflation,” said Ross Mayfield, investment strategy analyst at Baird. Private Wealth Management, told Insider. “I don’t think we’ve earned the benefit of the doubt on the inflation front yet.”
Investors were still largely expecting Fed Chairman Jerome Powell and his colleagues on the Federal Open Market Committee to cut the size of his December rate hike on Wednesday to 50 basis points from 75 basis points. base. A half-point increase would bring the fed funds rate into a range of 4.25% to 4.5%.
Here are three things to watch in terms of inflation, Fed policy and markets next week:
1. Inflation of basic services = slowdown, but not slowdown
Wage gains “hold at levels well above what is consistent with a 2% inflation target” even as there are signs of disinflation in the goods and housing sectors, Barclays said this week.
The multinational investment bank expects November CPI data to focus more on basic services, excluding housing prices, as Powell, in a recent Brookings Institution speech, suggested this would be a key part of the central bank’s reaction function in the coming months.
Barclays expects core services inflation to “remain robust” at 0.42% in November month-on-month and 6.8% year-on-year. “While this monthly pace represents a slowdown from levels seen earlier in 2022, it is worth highlighting that a reading of 0.42% m/m for basic services would be the highest since the start of 2005 through ‘at the onset of the COVID pandemic. Essentially, our forecast is for slowing, but not slowing, service inflation.”
2. Scaling up on the dot plot
The FOMC’s updated forecast for the federal funds rate is also due on Wednesday. September’s dot chart indicated that the rate – which influences the costs of loans, including adjustable-rate mortgages – could reach 4.75% in 2023.
“The Summary of Economic Projections (SEP) is expected to show a further increase in policy rate projections. We expect the median forecast for 2023 to increase by 50 basis points to 5.125%, in line with our terminal rate. points will then indicate 100 basis points of reductions each in 2024 and 2025,” Bank of America said in its note.
The Fed remains data dependent and policymakers have been hawkish overall as the labor market remains hot. Powell is likely to “lean forward at his press conference, pushing back on easing financial conditions and reminding investors that a slower pace of upside doesn’t mean a lower terminal rate,” BofA said.
The CPI has fallen this year from 9.1% in June to 7.7% in October, but remains well above the Fed’s 2% target.
3. “Shaky” markets
“The Fed tends to really focus a lot on wage inflation and we haven’t seen that soften as much as we’ve seen…gasoline prices are going down. Even things like wings of chicken were wildly expensive throughout the pandemic. Housing is obviously coming down quite drastically,” Scott Goginsky, portfolio manager at Biondo Investment Advisors, told Insider.
“I think some of the recent actions in the market have kind of softened that hit a bit. We can be ready, if we see continued easing with [CPI]for a sort of stepping stone to a little year-end rally,” he said.
The S&P 500 narrowed its bear market loss to around 17% after slipping as much as 27% this year. “The market has positioned itself in a wait-and-see mode, hovering between the two results” of the November CPI report, Goginsky said.
Mayfield to Baird sees stocks falling if the CPI rises more than expected. “We have returned much, if not all, of the rally after Powell’s speech last week. I think there is also growing concern about a recession.” he said. “It would be risk free, because most of the time we surprised on the upside.”