Investors should not have unrealistic expectations for the pace at which US inflation declines in 2023, analysts argue, ahead of Thursday’s December consumer price index report, which may test the mild stocks rally in the new year and may determine the size of the Federal Reserve. next interest rate goes up in February.

The December CPI reading from the Bureau of Labor Statistics, which tracks changes in prices paid by consumers for goods and services, is expected to show a 6.5% increase from a year earlier, a slowdown from the year-over-year increase. from 7.1% in the previous month, according to a Dow Jones survey of economists. The underlying price measure that removes volatile food and fuel costs is expected to rise 0.3% from November, or 5.7% year-over-year.

The December CPI will be particularly important in influencing the Fed’s decision at its next meeting which ends on February 1, Pimco economists said. They wait for inflation and labor market data easing enough will push the central bank to pause raising rates before its May meeting.

“After raising 50 basis points at the December meeting, we expect the Fed to move to a 25bp rate of increase in early February and ultimately pause around 5%,” wrote Tiffany Wilding and Allison Boxer, economists at Pimco, in a note on Tuesday.

Yet since the Fed’s December meeting, officials have tirelessly pointed out that the central bank need to raise interest rates above 5% to bring inflation to the 2% target, with no interest rate cuts expected this year. Fed funds futures traders now see a 78% chance of a 25 basis point increase at their February meeting, and a 68% chance of another in March, which would take the terminal rate to just 4.75- 5% mid-year, depending on tea CME FedWatch Tool.

Live MarketWatch: US stock futures rise as inflation data approaches

after two lower-than-expected CPI readingswhich have given the market hope that inflation will disappear quicklyDecember’s reading for inflation is essential to keep alive market hopes of a drop in inflation, Michael J. Kramer, founder of Mott Capital Management, said in a note Monday.

“Inflation swaps currently see inflation fall below 2.5% by summer 2023, which looks hopeful,” Kramer said. “This week’s CPI reading will be essential to maintaining that view and could prove disastrous if CPI turns higher than expected, throwing off market-based inflation expectations.”

The stock market is looking for an increase of “about 5%” in core inflation for December, said Rhys Williams, chief strategist at Spouting Rock Asset Management. “If you get a number among the low four [percent], the stock market rally will continue. The market is very focused on data points.”

US stocks got off to a positive start to 2023 on the hope that cooling inflation and a potential recession might persuade the central bank to slow the pace at which it is raising its policy interest rate.

Watch: ‘A year of two halves’: Stifel’s Barry Bannister expects short-term rebound in US stocks, trouble later in 2023

Williams believes that inflation is coming down, but will not reach the central bank’s 2% mark by the summer of 2023.

“I think at some point the markets will realize, ‘oh, we can’t get to 2%,’ and then the markets will probably get rid of that. I think maybe in the short term [the stocks go] they go up and then in the second quarter they go back down when people realize that 2% is unrealistic,” Williams told MarketWatch by phone.

US Stock Indices opened higher on wednesday. The S&P 500 SPX,
+0.32%
rose 0.5%, while the Dow Jones Industrial Average DJIA,
+0.09%
gained 0.3% and the Nasdaq Composite COMP,
+9.97%
advanced 0.6%.

By sbavh

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