By José Adinolfi
It's been a while since a red-hot inflation report sent wild gyrations in U.S. stocks, as has often happened in 2022, but that doesn't mean Tuesday's October consumer price index is destined to be a snooze fest for the markets.
In contrast, some Wall Street analysts believe it is possible, even likely, that the October CPI report will emerge as a critical catalyst for stocks, with the potential to drive the market higher with a weaker-than-expected number. .
At least one prominent economist expects the data to show that consumer prices were virtually unchanged last month, or even fell.
"I wouldn't be surprised to see a negative CPI inflation number for October," Neil Dutta, head of economics at Renaissance Macro Research, said in an emailed comment to MarketWatch.
"After all, retail prices for gasoline and heating oil fell a little more than 10% during the month and we know that energy, while it represents a small proportion of the total CPI, about 7%, can represent a much of the month to month. monthly variations of the CPI."
Markets at a crossroads
The October CPI report comes at a critical time for markets. Investors are trying to anticipate whether the Federal Reserve will follow through with raising interest rates further, as it indicated in its latest batch of projections, released in September.
Speaking on Thursday, Federal Reserve Chair Jerome Powell left the door open to another move, but qualified it - as the Fed has almost always done - by insisting that whatever the Fed decides will ultimately depend on the data.
These comments added even more emphasis to next week's data, Thierry Wizman, global currency and interest rates strategist at Macquarie, said in a comment emailed to MarketWatch on Friday.
"Our own view, expressed in recent days, is that the Fed (and by extension the fixed income markets) will not be anticipatory. Rather, the Fed will be very reactive to the data," he said. saying. "The next milestone is... the CPI. This is likely to have a calming effect on markets as traders weigh the possibility that a very low overall CPI result will further cool the prospect of excessive wage demands in the market labor".
Asymmetric risks
In assessing the potential impact of a soft inflation report next week, at least one market analyst hopes that the market reaction to the June CPI report, released on July 12, can serve as a useful model.
Stocks hit their highest levels of the year during that month, as many interpreted the slower-than-expected price rise as a major turning point in the Federal Reserve's battle against inflation. The S&P 500 posted its 2023 closing high on July 31, according to FactSet data.
Tom Lee, who anticipated both the outcome of the June CPI report and the market reaction, told MarketWatch that at this point, inflation would have to accelerate significantly again to have an adverse impact on the stock market.
The upshot of this is that risks for investors ahead of Tuesday's report are likely skewed to the upside. Even a slightly higher-than-expected figure probably wouldn't be enough to derail the market's rally in November. While a soft reading could reinforce expectations that the Federal Reserve is done raising rates, which would likely precipitate a rally in both stocks and bonds.
"I would say the setup looks pretty favorable," Lee said.
Even a slightly higher-than-expected figure probably wouldn't be enough to derail the market's rally in November.
"I think the reaction function is changing for the stock market," Lee said.
"Because the Fed and the public market saw the September CPI as a pretty decent number, and Powell even referred to it as such. In early 2023, I think people would have seen it as a mistake."
U.S. inflation has declined substantially since peaking at more than 9% year-over-year last summer, the highest rate in four decades. Data released last month showed consumer prices rose 0.4% in September, down from 0.6% the previous month but still slightly above expectations.
However, the more closely watched "core" reading reflected only a 0.3% increase, which was in line with expectations.
How long will the 'last mile' take?
There is a perception on Wall Street and within the Fed that reducing inflation from 3% to the Fed's target of 2% could pose more difficulties for the Fed. After all, most of the moderation from last summer's highs was driven by falling commodity prices and supply chain normalization as the economic impact of the COVID-19 pandemic took hold. faded away.
Powell has repeatedly warned of a "bumpy ride" and reiterated Thursday that the battle against inflation is far from over.
Watch: Powell says Fed wary of inflation 'fakes'
Inflation data released this month, and in the months to come, could help define investors' expectations about how long this "last mile" could take, helping these reports regain their importance for markets.
“I like a calm market, but I think the CPI is becoming more focused these days now that we're getting closer to that 2% target,” Callie Cox, US investment analyst at eToro, said during a phone call with MarketWatch.
Since the beginning of 2023, the S&P 500 index has not seen a single move of 1% or more on a CPI release day, according to FactSet data. By comparison, the largest daily swings seen in 2022 occurred on CPI days, with the large-cap index sometimes swinging 4% or more in a single session.
Economists surveyed by FactSet expect consumer prices to rise 0.1% in October, after a 0.4% increase in September. They expect a 0.3% rise for core prices, which exclude volatile food and energy. Powell has said he is closely monitoring core inflation, as well as so-called "supercore" inflation, which measures the cost of inflation for services excluding housing.
Without a doubt, the CPI report is not the only news that could affect the market in the coming week. Investors will also receive a monthly update from the Treasury that includes data on foreign purchases and sales of Treasury bonds, as well as a flurry of other economic reports, including readings that could influence the housing market and manufacturing activity.
There's also the producer price index, another closely watched barometer of inflation, due out on Thursday.
U.S. stocks have risen strongly since early November, with the S&P 500 SPX up more than 5.3%, according to FactSet data.
-Jose Adinolfi
This content was created by MarketWatch, operated by Dow Jones & Co. MarketWatch is published independently of Dow Jones Newswires and The Wall Street Journal.
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11-12-23 1201ET
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