Stocks rallied yesterday in the wake of a cooler than expected inflation figure which gave hope that the nightmare will end… sooner-ish. The initial pop in equities cooled throughout the session as the reality of today’s FOMC meeting cast clouds over the celebration.
Keep umbrellas handy. You can’t ignore the headline that inflation, according to the Bureau of Labor Statistics’ Consumer Price Index / CPI, eased more than expected last month. You also can’t ignore that the annual rate of inflation is still +7.1%, far above the Fed’s +2.0% target. That said, you have to applaud the progress made. And the market did, in fact, applaud the numbers. Initially, equities were hot with the S&P500 breaching a key technical level. However, the remainder of the session saw the early rally fade, leaving indexes higher, but well off their session highs. How can that be given the smallest monthly inflation gain since the summer, and before that, since 2020?
First off, there is an old Wall Street adage that goes: buy the rumor and sell the news. That is just a fancy way of saying that, despite the fact that the number was lower than economists were expecting, traders were hoping, even factoring in the beat. Once the number came out with silent hopes being met, bullish traders quickly lost interest.
I won’t bore you by going down the list of what categories did what, but I will tell you that there were some noticeable positives and some worrisome negatives. At a high level, goods prices do appear to be trending downward on a monthly basis. That is likely the result of improvements in the supply chain, and it is, indeed, good news because the Fed’s interest rate hammer is ineffective on supply and can only really impact demand. Services prices continued to rise, and economists attribute those gains to higher labor costs. Despite the many headlines of layoffs, the services sector is still struggling to fill openings and is likely causing companies to have to pay up to fill vacancies. The bulk of the layoffs so far have been coming from the bloated tech-oriented sectors. That brings us to the Fed and what it will continue to do to bring overall inflation back down to a tolerable level.
The Fed Chair clearly telegraphed a smaller +50 basis-point rate hike for this week’s meeting and given yesterday's cooler inflation number it is likely that the FOMC will stick to those expectations, which just happen to align with what the futures market is predicting. So, what happens this afternoon when the FOMC announces its policy? Well, we could get a little more of sell the news, because a +50 basis-point bump will not actually be… well news. There will also be plenty to ponder with the Fed’s quarterly release of its economic projections. Those will include its Dot Plot, which tallies up FOMC member’s projections for interest rates going forward. The Fed’s last Dot Plot had a median Fed Funds rate of around 4.5% for the end of 2023. That would be right around where the Funds Rate will be if the Fed hikes by its expected +50 basis points today. That is somewhat consistent with the futures market which now predicts that rates will peak at around 4.8% but will retreat (yes rate cuts) to just below 4.5% by the end of next year. While the new Dot Plot may align with expectations for 2023, traders will be focused on what comes after. September’s Dot Plot projected Fed Funds to be slightly below 4.00% by the end of 2024 and given the Fed’s recent rhetoric that is one possible area where it will surprise us. In other words, Fed members will possibly signal higher rates for longer which means the dots may show a higher Funds Target for 2024 and possibly even 2025. Finally, given the reality that inflation, while possibly ebbing, is still unusually high, the Fed will be careful not to signal any dovishness in its statement or the Chairman’s post-release press conference. In fact, Powell may even possibly temper expectations with some hawkish inuendoes. What this all means for the markets is a whole lot of volatility in today’s session, particularly later in the session.
WHAT’S SHAKIN’
Delta Airlines Inc (DAL) shares are higher by +3.95% in the premarket after it announced that it beat EPS and Revenues by +0.78% and +0.11% respectively. The company also provided forward guidance that exceeded analysts’ estimates. Potential average analyst target upside: +46.3%.
Charter Communications Inc (CHTR) shares are lower by -7.3% after it announced at an investor day, that next year’s CAPEX will come in above analysts’ forecasts as it continued to upgrade its fiber network. Potential average analyst target upside: +18.9%.
YESTERDAY’S MARKETS
Stocks traded higher yesterday, closing well below session highs in response to a cooler than expected CPI release. The S&P500 gained +0.73%, the Dow Jones Industrial Average traded higher by +0.30%, the Nasdaq Composite Index climbed by +1.01%, and the Russell 2000 Index advanced by +0.76%. Bonds gained and 10-year Treasury Note yields fell by -11 basis points to 3.50%. Cryptos climbed by +3.9% and Bitcoin climbed by +3.4%.
NEXT UP