The Consumer Price Index on Thursday is viewed as another critical test for the future path of the Fed’s tightening program.
Economy in Detail
Economists expect the year-over-year headline inflation rate to pull back to around +8% from +8.2% previously with the “core” rate remaining flat at +6.6%. It’s worth noting that this is the first month in several that consensus is not expecting an increase in the annual “core” rate. Signs of a cooling economy remain elusive even after the Federal Reserve has lifted its benchmark interest rate by the most aggressive pace in over four decades.
The October Employment Report on Friday was kind of a mixed bag, showing both a better than expected gain in jobs but a slight increase in the unemployment rate.
Traders are now nearly evenly divided on what the Fed’s December meeting will bring with about 52% betting on a 50-basis point hike and 48% expecting a fifth consecutive increase of 75-basis points.
A bigger-than-expected decrease in CPI will likely shift more consensus toward the 50-basis point view and provide a needed boost for the bulls that have continually had hopes dashed for a less aggressive Fed.
Many economists note that Q3 earnings results show widespread evidence of a slowing US economy that has hit companies across nearly every sector, energy being one of the few bullish exceptions. While there are still only glimmers of weakness showing up in the economic data so far, insiders argue it is just a matter of time before the data catches up and more significant signs of a pullback are revealed.
Bulls believe an economic pullback could force the Fed to ease or possibly abandon some of its planned monetary tightening. Bears don’t argue that a slowdown is imminent but are quick to warn that if we get a significant pullback in growth but inflation remains stubbornly high (aka stagflation), it will be an economic wrecking ball that spares few companies in the stocks market.
Bears further argue that slower growth and higher unemployment does not guarantee a more accommodative Fed as the central bank has made clear that bringing down inflation is a priority above all others, including the US job market.
Data to Watch
Another danger for US stocks that Wall Street is still nervous about is the strength of the US dollar which is greatly being reinforced by the Fed’s interest rate increases. The USD has weakened some over the past two weeks but currency traders warn it could again shoot higher if the CPI comes in hotter than expected.
A hotter CPI reading could also send bond rates soaring higher and add to stock market headwinds.
Aside from the CPI, there is not much on the US economic data calendar this week. Consumer Credit is due today, followed by the NFIB Small Business Optimism Index on Tuesday, and Consumer Credit on Friday.
It is an important week for China data though, with trade data due out overnight tonight and inflation numbers set for release overnight on Wednesday. China will also release loan data sometime this week.
Keep in mind, over +80% of the S&P 500 companies have already reported earnings.
A few of the bigger companies reporting today include Activision Blizzard, BioNTech, Diamondback Energy, Palantir, and Ryanair.
Meta (Facebook) is supposedly going to announce large layoffs this week and Apple reported over the weekend that the Chinese Covid related lockdowns are creating some bigger headwinds for iPhone production.