Stocks enjoyed a modest uptick through noon today as investors closely analyzed the latest inflation report ahead of the Fed’s final policy meeting for 2023.
The Dow Jones Industrial Average saw a slight increase of about 0.3%, or nearly 100 points, while the S&P 500 remained relatively unchanged. The tech-heavy Nasdaq Composite edged up by approximately 0.2%. This movement follows the closure of all three major indexes at their highest levels since early 2022 on Monday.
The Consumer Price Index (CPI) revealed a slight increase in prices, rising by 0.1% from the previous month and 3.1% year-over-year for November. Economists had anticipated a flat month-over-month CPI and a 3.2% year-over-year increase according to Bloomberg.
A notable factor in the CPI report was the decrease in energy costs, which contributed to the subdued headline figures. Energy prices fell by 2.3% month-over-month and 5.4% annually, influenced by a 6.0% drop in gas prices from October to November and an 8.9% decrease on an unadjusted annual basis.
Focusing on core inflation, which excludes food and gas, the report showed a 4.0% increase over the last year, consistent with the annual increase observed in October. This marks the first time since March that the annual core inflation rate hasn’t declined. Month-over-month, core prices rose by 0.3%, a slight uptick from October’s 0.2% increase, aligning with economists’ predictions.
Stocks initially dipped in early trading but rebounded by mid-morning as the market absorbed the inflation data. Michael Pearce, lead US economist at Oxford Economics, noted, “Another sharp drop in gasoline prices last month kept headline CPI inflation on a downward trend but core inflationary pressures remain more stubborn, with core inflation unchanged at 4%.” He added that underlying inflation is expected to decrease gradually next year, leading to the Fed likely pushing back against market expectations of early rate cuts.
The report also highlighted a 6.5% annual increase in the shelter index, contributing nearly 70% to the total rise in core inflation. On a monthly basis, the index saw a 0.4% increase, slightly higher than October’s 0.3% rise.
Rent prices continued to be high, with both rent and owners’ equivalent rent indexes rising by 0.5% monthly. Other sectors showing increases included medical care and motor vehicle insurance, while used car prices reversed their recent downward trend, rising by 1.8%.
Food prices also saw a modest increase, with the food index rising by 2.9% over the last year and 0.2% from October to November. Notably, egg prices surged by 2.2% month-over-month.
In contrast, the indexes for apparel, household furnishings and operations, communication, and recreation showed decreases over the month.
As investors await the Federal Reserve’s decision on interest rates, the general expectation is that the Fed will not raise rates in December, especially following recent dovish comments from Fed officials. Christopher Waller, a Fed governor, expressed increasing confidence in the current interest rate levels to combat inflation.
Post-inflation data, market predictions indicate a near certainty that the Federal Reserve will maintain rates on Wednesday, with a roughly 40% chance of a rate cut by March. However, economists remain cautious, with Pearce suggesting that market expectations for early rate cuts next year might be premature. He anticipates more persistent wage and core inflation pressures, potentially delaying rate cuts until September. Wages were up 0.5% month-over-month in November after seeing wages fall in the two months prior.
Following the inflation report, US bond yields saw a slight decrease, with 10-year Treasury yields dropping about 2 basis points to around 4.22%. It’s highly unlikely that Powell will raise rates tomorrow, but don’t be surprised if he makes hawkish remarks. The recent slide in the 10-year yield has effectively undone the last two rate hikes. By delivering a hawkish post-FOMC speech tomorrow, Powell could effectively tighten financial conditions without even lifting the fed funds rate.
And, following the stock market’s epic rally of the last six weeks, equities could certainly handle a bit of selling.
