Inflation and the Fed: What to watch

The last two major macro events of 2023 will greet investors in the week ahead.

November’s Consumer Price Index (CPI) report out Tuesday morning will offer the last piece of the inflation puzzle ahead of the Federal Reserve’s final policy announcement of the year, due out Wednesday afternoon.

A press conference with Fed Chair Jerome Powell and a new set of economic forecasts from Fed officials for the coming years will also highlight the proceedings on Wednesday. Producer prices out Wednesday morning, retail sales set for release on Thursday, and a look at US manufacturing activity on Friday also highlight the economic calendar.

On the corporate side events should be relatively sparse, with quarterly updates from Costco (COST), Adobe (ADBE), and Lennar (LEN) serving as the week’s biggest names to report.

Markets enter the week with serious momentum, as all three major US stock market indexes have finished the last six weeks with gains. For the year, the Dow Jones Industrial Average (^DJI) is up more than 9% while the S&P 500 (^GSPC) is up nearly 20%. The Nasdaq Composite (^IXIC) gained nearly 38%.

The S&P 500 is now less than 5% away from its record closing high.

Fed on hold

At 2 p.m. ET on Wednesday, the Fed will announce its final policy decision of the year, with markets pricing in a near 100% chance the central bank keeps interest rates unchanged in a range of 5.25%-5.50% to cap 2023.

Alongside this policy decision Fed officials will release an updated Summary of Economic Projections, which includes its “dot plot” that maps out policymakers’ expectations for where interest rates could be headed in the future. Forecasts on inflation, GDP growth, and unemployment will also be released.

Powell’s press conference is slated to begin at 2:30 p.m. ET, with investors keen to hear how the Fed chair balances investor expectations that interest rates could begin falling as early as March.

The last time Powell spoke publicly, on Dec. 1, he called the rate cut speculation “premature.”

“It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease,” Powell said on Dec. 1 in prepared remarks at Spelman College in Atlanta. “We are prepared to tighten policy further if it becomes appropriate to do so.”

Investors will be watching to see if any recent data — notably the November jobs report and Tuesday’s inflation reading — sways how the central bank discusses the path forward for policy.

The assembled press Powell will field questions from on Wednesday will be sure to prod the Fed chair for answers about the central bank’s next move lower. But JPMorgan chief economist Michael Feroli doesn’t think Powell will engage in the rate cutting discussion.

“At the press conference we think Powell will try to move the conversation away from the timing of the first ease by noting that currently the Committee is only considering whether they should stay on hold or tighten policy,” Feroli wrote in a note to clients on Friday.

Michael Pearce, lead US economist at Oxford economics, also sees Wednesday’s press conference skewing slightly hawkish, indicating a bias from Powell and the Fed to keep interest rates higher for longer.

“We expect the updated economic projections and the post-meeting press conference to push back against the idea that rate cuts could come onto the agenda anytime soon, emphasizing that inflation is still too strong and that risks are to the upside,” Pearce wrote in a note to clients on Thursday.

“If anything, we expect policymakers to err on the side of leaving rates too high for too long.”

U.S. Federal Reserve Board Chairman Jerome Powell arrives to a news conference following a closed two-day meeting of the Federal Open Market Committee on interest rate policy in Washington, U.S., July 26, 2023. REUTERS/Elizabeth Frantz (Elizabeth Frantz / reuters)

Inflation progress in focus

The day before the Fed’s announcement, investor attention will be focused on inflation when November’s Consumer Price Index (CPI) is released at 8:30 a.m. ET.

Economists forecast headline CPI rose 3.1% over the prior year in November, a decrease from the 3.2% rise seen in October. Prices are set to be flat on a monthly basis for the second straight month.

On a “core” basis, which strips out the volatile food and energy categories, CPI is forecast to rise 4% over last year in November, unchanged from the increase seen a month prior.

The Fed targets 2% annual inflation.

Monthly core price increases are expected to clock in at 0.3%, an uptick from the 0.2% month-over-month increase seen in October.

“Similar to last month, we expect a drag on headline [inflation] from falling energy prices with upward pressure remaining on the core segment from components like [owner’s equivalent rents]/rents, insurance, and car maintenance as well as other services,” Jefferies’ economics team led by Thomas Simons wrote in a note on Friday.

Tuesday’s report will offer investors the first look at inflation in November after data in October showed both core CPI and core PCE, the Fed’s preferred inflation measure, reached the lowest levels of annual inflation since September and April of 2021, respectively.

Weekly calendar


Economic data: No notable data

Earnings: Casey’s (CASY), Oracle (ORCL)


Economic data: NFIB Small Business Optimism, November (90.7 expected, 90.7 previously); Consumer Price Index, month-over-month, November (+0.0% expected, +0.0% previously); Core CPI, month-over-month, November (+0.3% expected, +0.2% previously); CPI, year-over-year, November (+3.1% expected, +3.2% previously); Core CPI, year-over-year, November (+4.0% expected, +4.0% previously); Real average hourly earnings, year-over-year, November (+0.8% previously)

Earnings: No notable companies set to report.


Economic data: MBA Mortgage applications, week ending Dec. 8 (2.8%); Producer Price Index, month-over-month, November (+0.0% expected, +0.5% previously); PPI, year-over-year, November (+1.1% expected; +1.3% previously); Core PPI, month-over-month, November (+0.2% expected, +0.0% previously); Core PPI, year-over-year, November (+2.2% expected; +2.4% previously); FOMC Rate Decision, lower bound (5.25% expected, 5.25% previously); FOMC Rate Decision, upper bound (5.5% expected, 5.5% previously)

Earnings: Adobe (ADBE)


Economic data: Initial jobless claims (221,000 expected, 220,00 previously); Retail sales, month-over-month, November (-0.1% expected, -0.1% previously); Retail sales, ex auto and gas, November (0.2% expected, +0.1% previously); Import prices, month-over-month, November (-0.8% expected, -0.8% previously); Export prices, month-over-month, November (-1.0% expected, -1.1% previously)

Earnings: Costco (COST), Lennar (LEN)


Economic data: Empire Manufacturing, December (2.0 expected, 9.1 previously); Industrial production, month-over-month, November (+0.3% expected, -0.6% previously); S&P Global US Manufacturing PMI, December preliminary (49.3 expected, 49.4 previously); S&P Global US Services PMI, December preliminary (50.7 expected, 50.8 prior)

Earnings: Darden Restaurants (DRI)

Josh Schafer is a reporter for Yahoo Finance.

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