Stock bulls are hoping for more signs of declining inflation in the April Consumer Price Index (CPI) due out this morning.
Inflation
Economists expect the year-over-year headline rate to remain unchanged at +5.0% with the “core” rate (strips out food and energy) slowing slightly to +5.5% from +5.6% previously. While those forecasted numbers wouldn’t be much of an improvement, the more important thing is that the annual rates don’t accelerate, which is what “core” CPI did in March.
There are two more key inflation reports before the Fed’s next policy meeting in mid-June – the PCE Prices scheduled for release on May 26, and May CPI scheduled for release on June 13, the same day the central banks’s policy meeting begins.
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Bulls are expecting inflation data starting in May will begin to show more significant signs of slowing as year-ago comparison numbers get larger and declines in shelter prices start to show up. I’m not so sure about that as I’m hearing the home real estate market is starting to heat back up again with many listings getting multiple offers well above asking price.
Debt
I personally, don’t think things are cooling down all that much in residential real estate. I think there is such a lack of inventory that demand is still overwhelming. Bears warn that this could keep inflation above the Fed’s target rate longer than bulls anticipate. Most bulls expect the Fed to be cutting rates by the end of 2023 but if inflation is still holding much above the +2% target rate, that might not be an option.
More near-term, many on Wall Street think the debt ceiling battle in Washington may be the bigger challenge for stock prices. A meeting yesterday between President Biden and congressional Republicans reportedly made little progress. The precise date the US government will run out of cash to pay its bills is not yet known but it could come as soon as June 1.
Most on Wall Street believe the two sides will strike a deal to extend the debt limit but the closer the deadline gets with no solution, the more nervous investors are going to become. Back in 2011, under then-President Obama, lawmakers faced a similar showdown over the debt ceiling that resulted in the first downgrade to US credit in the nation’s history. The Obama Administration and Republicans struck a last minute deal to end that battle but not before the S&P 500 lost some -10%.
Wall Street is nervous that negotiations may again be drug out until the eleventh-hour, which could lead to increasing volatility in stock and bond markets in the meantime.
The US has never defaulted on its debt before, making it nearly impossible to predict what the full economic impact could be. Moody’s Analytics has previously estimated default could result in a 2008-style financial crisis. During previous simulations from 2021, the firm said economic growth could shrink -4% from peak to trough, while 6 million jobs could be at stake.
Joblessness could also hit 9%, and household wealth could fall by -$15 trillion during a massive stock market decline. On the earnings front today, the big highlight is Disney, which reports after the close. Nutrien and Roblox also report today.
SP500 Traders Are Flat Ahead of CPI
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