A Valentine's Day surprise doesn't usually include egg and gas prices, but the heart wants what the heart wants, and Wall Street is entranced by January's Consumer Price Index.
What's happening: Investors will get some market direction clarity on Tuesday morning with the release of key inflation data. And though consumer prices in January are expected to climb by 0.5% from December, the annual rate is expected to tick down to 6.2%, continuing a trend of disinflation that began last summer.
Core CPI, which is also being released, strips out volatile energy and food prices, and is more closely watched by the Federal Reserve. It is expected to have remained steady between December and January and to tick down year over year.
If inflation comes in higher than expected, there will be some heartbreak on Wall Street as it could mean that the Fed has more work to do. But if disinflation accelerates, there could be a fairly large boost in market sentiment and a surge in traders' commitment to equities.
Either way, expect a bit of volatility, says Randy Frederick, managing director at Charles Schwab. Market swings have been significant on CPI release days over the past few months.
Markets closed higher on Monday ahead of the report as investors expressed optimism — but they might be getting ahead of themselves. "It wouldn't shock me in the least," if the CPI report surprises on the downside and markets give up all of their gains on Tuesday, said Frederick.
The report could exemplify the long and "bumpy" path of disinflation that Fed Chair Jerome Powell referenced last week in an interview with the Economic Club of Washington, DC.
It's not all about the Fed: Traders are infatuated with CPI, but it's likely going to affect markets more than it will future Fed policy. It's good to keep that in mind as volatility could lead to a roller coaster ride on Wall Street, said Frederick.
"CPI is the big inflation report that affects markets more than any other," he said. "The Fed pays more attention to PCE [the Personal Consumption Expenditures Price Index], but consumers and investors pay a lot of attention to the CPI. It tends to be the one that moves markets most by far."
What could go wrong: The price of goods has come down over the past few months as supply chain pressures have eased — core goods inflation has declined from 12.3% in February 2022 to just 2% last month — but there are signs that the largest contributors to a drop in inflation have already tapered out, said Gargi Chaudhuri, head of iShares Investment Strategy, Americas.
The decline in new and used car prices may be ending, said Chaudhuri, with new car sales hitting their most brisk pace since May 2021. The weakening of the US dollar since November could also mean the prices of imported goods will rise.
An increase in energy prices, driven by higher gasoline prices, will also likely drive monthly headline numbers higher. Data from AAA shows that gas prices rose by 4.4% in January.
Inflation in the services sector is even more worrisome. Analysts from Bank of America predict that the cost of core services likely rose by 0.5% from December, owing largely to a 0.7% increase in shelter costs.
Even beyond housing, the services sector has seen year-over-year inflation higher than 3.9% every month since March 2021, said Chaudhuri. And as Powell noted in Washington last week, the stickiness of core services inflation is his greatest concern.
Comments
Post a Comment