CPI and FOMC To Set a Tone Till Year-end

Federal Reserve to Hike Rates 50 Basis Points

Nothing has really changed as far as Wall Street expectations – most still expect a 50-basis point hike and a moderately less “hawkish” tone from Fed Chair Jerome Powell when he speaks on Wednesday following the release of the latest Fed decision.

That’s not to say that anyone expects Powell to deliver all clear on inflation, but bulls do anticipate he’ll deliver a more positive outlook on the inflation trajectory and perhaps spend some time highlighting areas where the Fed’s tightening program is having an impact.

Expectations down the road, are that they Fed will again hike by 50-basis points at its February meeting, and then hike by just 25-basis points at its March meeting. At that point the Fed will take a wait-and-see approach.

If Powell hints to something different in the road ahead the trade will react aggressively as it tries to readjust. Perhaps more market moving might be today’s Consumer Price Index (CPI) where many bulls are expecting a meaningful drop in both the headline and “core” rates, the latter of which strips out food and energy prices.

CPI Inflation Report

Consensus is looking for a year-over-year headline rate of +7.3% and a “core” rate of +6.1%. A much-higher-than-expected read may be a tough one for the bulls to overcome, especially as investors also confront signs of slowing US economic growth.

One of the biggest worries on Wall Street heading into 2023 is that inflation will remain “sticky” while growth teeters on recession and unemployment climbs – aka “stagflation.” Keep in mind, the Federal Reserve is especially keen to cool the US job market as they view the current wage squeeze as one of the main contributors to inflation.

While big layoff announcements continue to make headlines, those have not really been felt across the wider labor market. The latest payroll data showed unemployment still remains close to a historic low at just 3.7% while wages are increasing at an annual rate of more than +5%.

Bears believe this means the Fed still has a lot of work to do, In fact, many economists believe that it could take years for inflation to get back to the central bank’s target level of +2%. Meaning that while more dovish Fed signals this week could help prop markets up in the short-term, the fundamentals for a more robust stock market in 2023 are not yet lining up. Don’t forget, the DEC22 Stock Indexes in the futures market go off the board this Friday, many traders are already rolling to the MAR23 contracts.