CPI Report Comes In With a Bang

(Please enjoy this updated version of my weekly commentary published December 13th, 2022 from the POWR Growth newsletter).

So, before we dive into today’s market-moving CPI report, I want to give you a quick recap of all the other big economic reports we got last week.

Productivity and labor costs: Revised higher than expected while labor costs for the quarter were revised down; both good signs when you’re looking to curb inflation.

Consumer credit: Lots of borrowing in October. Consumer credit continued to climb; the year-over-year growth rate is 6.9%, which is faster than 4.7% wage growth for the month. Strong sign of consumer demand.

Unemployment claims: Hit a 10-month high, due in part to a number of big layoffs at major companies. The 1.7 million jobless claims was slightly higher than economists were expecting, evidence that the strong labor market is softening.

Producer Price Index (PPI): Rose by 7.4% in November (year over year); that’s lower than the October growth rate (8.1%), but higher than what economists were forecasting for the month (7.2%). Inflation is falling… just slower than people were expecting.

University of Michigan Index of Consumer Sentiment: Improved more than expected. Inflation concerns also fell to a 15-month low.

Which brings us back to today’s Consumer Price Index (CPI) report.

For November, prices rose 7.1% year over year… which is faster than they climbed in October. BUT! — and this is the important part — that’s a slightly slower pace than economists were expecting.

The forecast for November was a 7.3% increase in prices.

Cue the confetti! That’s two months in a row where inflation came in slightly less than economists were expecting!

The S&P 500 (SPY) opened 2% higher on the news, although gains have moderated in the few hours since. We’re currently up about 0.7% for the day.

So, what does all this mean for us?

Well, I think it’s almost guaranteed that we’ll get a 50-basis point hike from the Fed tomorrow afternoon. There have been more than a few data points that show the economy is getting weaker, which has been the purpose behind these big, consecutive rate hikes.

It certainly doesn’t mean we’re at the start of our next bull market. In fact, some of these data points make me more wary of a potential recession. But the inflation news has been so bad for so long, I’m not surprised people are excited to see a little progress.

Don’t worry; the Fed still has plenty of time to spoil the party. If Powell’s post-meeting comments are in any way bearish, it could spark a big negative market reaction.

In fact, I’m pretty sure this is exactly what’s going to happen, since Powell will probably need to remind us all that the softening CPI numbers are a step forward, but there’s still much more work to be done (and pain).

The Fed’s “dot plot” could also put a damper on the CPI party. When the Fed last released these projections in September, they showed forecasts that the fed funds rate would peak between 4.75% and 5.0% sometime in 2023 before slowly coming back down the following years.

If the newest dot plot shows more Fed officials casting their “dots” at this highest level, or some officials forecasting an even higher level in 2023, or dots forecasting a heightened level for longer, then we would likely see some selling.

Personally, I still think it’s a little silly that we’re partying at all over a very minor “dovish” shift (and is it REALLY dovish if it’s still a rate increase??) when it’s still just as likely that we’ll be facing interest rates of 5% or higher over the next few years. But that’s just me.

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All the Best!

Meredith Margrave
Chief Growth Strategist, StockNews
Editor, POWR Growth Newsletter

SPY shares . Year-to-date, SPY has declined -14.39%, versus a % rise in the benchmark S&P 500 index during the same period.

Meredith Margrave has been a noted financial expert and market commentator for the past two decades. She is currently the Editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Meredith's background, along with links to her most recent articles.

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