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CPI report comes in with a bang

Last week I reviewed all the reports we should have expected for the December Fed meeting (and the announcement of rate hikes)… including the all-important Consumer Price Index (CPI) report released this morning. It felt premature to send out my pre-Fed meeting market commentary before that last major inflation metric came out, and, boy… am I glad I waited. Because it’s a doozy of a rapport. How this report affected the S&P 500 (SPY) and what it could mean in the coming days is the focus of this week’s commentary. Read on below for more.

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(Enjoy this updated version of my weekly commentary published Dec. 13e2022 of the POWR Growth newsletter).

So, before we get into today’s market-moving CPI report, let me give you a quick recap of all the other major economic reports we received last week.

Productivity and labor costs: Revised higher than expected as labor costs were revised down for the quarter; both good signs if you want to curb inflation.

Consumer Credit: Borrow a lot in October. Consumer credit continued to rise; the annual growth rate is 6.9%, which is faster than the 4.7% wage growth for the month. Strong sign of consumer demand.

Unemployment claims: Reached a 10-month high, partly due to a number of major layoffs at large companies. The 1.7 million claims for unemployment benefits were slightly higher than economists had expected, evidence that the strong labor market is weakening.

Producer Price Index (PPI): Up 7.4% in November (YoY); that’s lower than October’s growth rate (8.1%), but higher than what economists had predicted for the month (7.2%). Inflation is falling… just slower than people expected.

University of Michigan Consumer Sentiment Index: More improved than expected. Inflation worries also fell to a 15-month low.

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

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

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

Aim the confetti! That’s two months in a row where inflation was slightly less than economists had expected!

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

What does all this mean for us?

Well, I think it’s almost guaranteed that we’ll get a 50 basis point rate hike from the Fed tomorrow afternoon. There are more than a few data points showing that the economy is weakening, which was the purpose behind these large, sequential rate hikes.

It sure not means we are at the beginning of our next bull market. Some of these data points make me even more wary of a possible recession. But inflation news has been so bad for so long that I’m not surprised people are excited to see a little bit of progress.

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

In fact, I’m pretty sure that’s exactly what’s going to happen, as Powell will probably have to remind us all that the declining CPI numbers are a step forward, but there’s a lot 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 projected Fed Funds rates to peak between 4.75% and 5.0% sometime in 2023, before slowly declining again over the next several years.

If the latest point chart shows more Fed officials throwing their “points” at this high, or some officials predicting an even higher level in 2023, or points predicting an elevated level for longer, we’d probably see some selling .

Personally, I still think it’s kind of silly that we’re partying at all during a very small “smooth” shift (and is it REALLY moderate if it’s still a rate increase??) when it’s still just as likely that we they will be confronted with interest rates of 5% or higher in the coming years. But that’s just me.

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All the best!

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

SPY Stocks. Year-to-date, SPY is down -14.39%, versus a percentage increase in the benchmark S&P 500 index over the same period.

About the author: Meredith Margrave

Meredith Margrave has been a well-known financial expert and market commentator for the past two decades. She is currently the editor of the POWR growth and POWR shares under $10 newsletters. Learn more about Meredith’s background, along with links to her most recent articles.


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