Markets Grow +1% Ahead of Thursday CPI

Markets Grow +1% Ahead of Thursday CPI

Markets put up a strong trading day today, with investors seeing plenty of risk already having been stomped out of many sectors, including Tech. The Nasdaq led the way for the session, +189 points or +1.76%, followed by the S&P 500, +1.28% on the day. All major indices closed at session highs, with the Dow gaining +268 points, +0.80%. The small-cap Russell 2000 finished up +1.17%.

Even though it’s not baseball season, we’ll still use this analogy: market participants look to have gotten a lead off first base ahead of tomorrow morning’s main inflation metric, the Consumer Price Index (CPI). Headline CPI is expected to have dipped -0.1% in December, though +0.3% on core (minus volatile food and energy costs). Year over year, +6.5% is expected — the first sub-7% numbers since late 2021. Core CPI year over year consensus is for +5.7%, the first sub-6% read in a year.

Thus far, economic prints as important as CPI (and there aren’t that many of them) are depicting a measured, orderly retreat from peak inflation metrics seen in 2022. This is all courtesy of the Fed hiking interest rates 425 basis points (bps) over the past 10 months, with more hikes promised in the month(s) to come. Currently, a 50 bps increase is widely anticipated upon the Fed’s next decision three weeks from today.

Therefore, should we see signs that CPI is deteriorating more rapidly than we’ve seen in recent months, it may be a sign that the U.S. economy is straining more that expected under the weight of high interest rates. If economists and others who study such things believe this is indeed the case, we may see the Fed trim its upcoming increase to 25 bps, to a Fed funds rate range of 4.50-4.75%.

Doing this would also bring into question whether the Fed really intends to breach the 5% interest rate level and do so for a long period of time, as it has promised as recently as this week. Through this prism, it makes sense that equity investors might want to get ahead of the Street on holdings at current levels, as a dovish Fed would portend well for the near-term stock market.

But the proof will be in the pudding, as they say. Anything less than a sizable drop-off from recent CPI levels likely won’t have such a positive impact on markets; it’s wholly possible we could see a reversal in tomorrow’s trading day, should these inflation numbers remain stubbornly high.

KB Home ( Free Report) is out with Q4 earnings after today’s closing bell, missing estimates on both top and bottom lines: earnings of $2.47 per share missed the $2.85 in the Zacks consensus, but still nicely above the $1.91 per share posted in the year-ago quarter. Revenues were also light: $1.94 billion in the quarter was beneath the $1.99 billion analysts were expecting. Guidance on average home selling price has been bumped down, as well — from $510K previously forecast to $490-500K today. Shares are down -4% in after-market trading.

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Written by Susan Bellini