2024-03-11 22:27:00
The consumer price index for the month of February is expected to be published today (Tuesday) before the opening of trading in the United States. This is one of the most influential data on trading in the stock market and the bond market. Last month, this figure was a negative surprise and caused relatively sharp price drops, which were corrected immediately after. Once again, traders are worried about the publication of the data that may be critical to the continuation of trading in the capital market. Later this week (Thursday) the producer price index will also be published, which also has a significant impact on the market.
The market reaction on the days of publication of the consumer price index in 2023 was minor compared to 2022, but the latest figure changed this pattern. The three major indexes recorded the sharpest declines on the day the index was released since September 2022. Is this a one-time behavior?
The market expects the index to rise by 0.4% on a monthly basis compared to only 0.3% in January. The annual index is expected to remain at 3.1%, similar to the previous month. One of the main factors for the increase in inflation in February is fuel prices. The average across the United States reached $3.4 per gallon compared to just over 3% in January. Gas prices usually rise towards the summer. As a result of the increase in fuel prices, transportation prices also increase. In addition, insurance prices for cars and motorcycles continue to climb, and have already risen by 20% in the last year. The trend continued in the last month as well. In total, transportation prices, which make up 6% of the index, have increased by 10% in the last 12 months.
Another major factor in the rise of the index continues to be the “rooftop” component, and it is also expected to climb this month. The figure is considered one that is updated late, therefore there is an expectation that in the coming months the relief in inflation will come precisely from this figure. In the meantime, he continues to be a weight (and also to arouse criticism regarding his method of calculation).
The core index, which does not include the volatile energy and food prices, is actually expected to moderate slightly according to the forecasts and stand at 0.3% in February compared to 0.4% the previous month. The annual core index is expected to drop to 3.7% compared to 3.9% in January.
The index is expected to challenge the expectations of the Fed’s interest rate cuts. These expectations have undergone many shocks in recent weeks and months. Expecting six or seven interest rate cuts at the end of last year, expectations moderated to only 2-3 cuts. According to BMO bank strategists Jan Lingen and Will Hartman, the index figure will be a “potential turning point” for interest rate forecasts. Not only the market will be affected by it, but also the Fed itself, which repeated the statement that it expects to see “additional positive inflation data” before making a final decision on lowering interest rates. Next week, the Fed is expected to publish the interest rate decision together with the “points table” that reflects the Fed’s expectations regarding the future performance of the economy (GDP, unemployment, inflation), as well as regarding the expected interest rate policy.
Now the first interest rate cut in June is priced at more than 50%. In relation to next week’s meeting, the expectations are that the interest rate will remain the same once again (above 97%). In relation to May, the chance of an interest rate cut is only 22% compared to 52% a month ago.
How will the market react to the interest rate data?
As long as the core data are below those of January, the market is expected to react positively, or at least not negatively. The risk is, of course, that the core data will not show an improvement and will strengthen the fears of “sticky” inflation, which may further push back the interest rate cuts that the market is so looking forward to, and lead to sharp declines like last month.
While the uncertainty regarding the interest rate cuts continues, the stock market continues to cruise at record prices, and the increase in yields in the bond market has also slowed down in recent weeks. The SP500 has already set an all-time high price 16 times since the start of the year, and the Nasdaq also recently hit an all-time high for the first time since late 2021. Ten-year bond yields are at 4.088%, the lowest since early February.
At JP Morgan Optimistic regarding Fed policy and regarding the stock market. Phil Camporil, investment manager at the bank says that “they (the Fed) don’t need to see inflation at 2% to lower interest rates. They just need to see that inflation doesn’t get worse.” According to him, “This is a great time to take a risk in the United States.” Based on the higher-than-expected unemployment figures published on Friday, he says that “the Fed is still on track to lower interest rates this year without entering a recession. This is really good for stocks.”
Compared to the lesser-known investment manager, the CEO of my bank, Jamie Dimon, sounds a little more cautious. According to him, the American economy is “perfectly fine”, but there may be “a bit of a bubble” in the stock market. According to him, the Fed should be careful with interest rate cuts, and he is Had he been on the decision-making committee, he would have waited with the interest rate cuts until after June.
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