Stock bulls remain on shaky ground as another inflation print comes in higher than expected. The culprit this time is the Producer Price Index, which rose almost twice as much as Wall Street was expecting for January.
Economic data
Several Fed officials yesterday weighed in on this week’s “hot” data, with St. Louis Fed President James Bullard voicing support for a 50 basis-point hike at the central bank’s next meeting on March 21-22 while Cleveland Fed President Loretta said inflation risks remain “tilted to the upside.”
Mester sees inflationary risks stemming from the ongoing war between Russia and Ukraine and increased commodity demand as China reopens from Covid-19 lockdowns. Mester and Bullard also apparently pushed for a 50 basis-point hike at the previous meeting, though the actual increase was 25 basis-points. Most still anticipate 25 basis-point hikes at the March and May meetings (no meeting in April) but some are now starting to pencil another hike in June and traders have begun lifting the odds for another hike in July.
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Keep in mind, bulls have been hoping that the anticipated March hike could be the Fed’s last in this cycle. Fed officials this week have mostly been advocating to lift rates above 5% and hold them there for an extended period, which has been the script for several months now.
The Fed funds rated currently stands at 4.5%-4.75%. More investors are also now betting on a “no landing” scenario for the economy, meaning the economy continues to grow and inflation remains elevated.
This is decidedly better than a combination of no-growth and high inflation but would still have it’s own set of negatives for the stock market, including the likelihood that Federal Reserve will not be able to end rate hikes in the near-future.
Some worry sustained inflation could even prompt the Fed to deliberately cause a recession. Meanwhile, the idea of the Fed “pivoting,” or lowering rates, as many bulls had been hoping for by the end of the year is looking more and more like a pipe dream.
Data to watch
Today, investors will be digesting Import/Export Prices on the data front, and earnings results from Deere & Co.
Looking to next week, remember that US markets are closed on Monday for the “Presidents’ Day” holiday. The top data highlight next week will be the PCE Prices Index on Friday, which is one of the Fed’s favorite inflation gauges. The report last month showed continued moderation with the year-over-year headline rate dipping to +5.0% from 5.5% previously.
Other data for the week includes preliminary PMI reads and Existing Home Sales on Tuesday; the second estimate of Q4 2022 GDP on Thursday; and New Home Sales and Consumer Sentiment on Friday.
Earnings from US companies next week will include some key consumer goods businesses with the top highlights being Walmart and Home Depot on Tuesday and TJX on Wednesday.
Other releases include Medtronic and Diamondback Energy on Tuesday; eBay, NVIDIA, and Rio Tinto on Wednesday; Block, Intuit, Moderna, Monster Beverage, VMware, and Warner Bros. Discovery on Thursday; and Berkshire Hathaway on Friday.
SP500 Bulls Are on the Shaky Ground: Inflation, Rates
Wishing you a great week!
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