Tuesday’s November CPI data lacked shock value, coming in mainly as expected. Inflation remains above pre-pandemic levels but doesn’t look high enough to cause alarms on the interest rate front. The Fed begins its meeting today and producer prices are due first thing tomorrow.
Wall Street shows little initial reaction to CPI as inflation looks relatively tame
FOMC meeting begins today, with no rate move expected but focus on 2024 projections
Earnings calendar starts to pick up as investors look ahead to Costco, Lennar, Adobe
(Tuesday market open) Stocks and Treasuries hung on to earlier premarket gains following a relatively tame report on U.S. consumer prices Tuesday morning.
The overall Consumer Price Index (CPI) rose 0.1% in November, while core CPI, which strips out food and energy, rose 0.3%. Analysts had expected a flat headline reading, and core monthly data met expectations, according to Trading Economics.
On an annual basis, year-over-year core CPI of 4% remained the lowest since May 2021, the government said. The Federal Reserve closely tracks core inflation as it decides on rate policy.
At first glance, the data lacked shock value. That said, aspects of the report indicate there’s still work to do to bring price growth back to comfortable levels.
“Nothing too extreme in the report,” said Kevin Gordon, senior investment strategist at Schwab. “If anything, it confirms that services inflation continues to take longer to ease back to target, evidenced by the fact that super-core (core services ex-housing) bounced back and rose by nearly 0.5% month-over-month.”
Stepping away from CPI, today marks the start of the Federal Open Market Committee (FOMC) meeting, with a rate decision due at 2 p.m. ET Wednesday followed by remarks from Fed Chairman Jerome Powell. Wednesday’s meeting includes new rate and economic projections, but keep in mind policy makers already handed those in, meaning tomorrow’s projections won’t be influenced by today’s inflation number.
The market builds in nearly 100% odds of interest rates staying on pause at a target range of between 5.25% and 5.5% where they’ve been since the end of July.
The European Central Bank (ECB) and Bank of England (BoE) also meet later this week. Closer to home, earnings from Adobe (ADBE) and Costco (COST) are on the weekly calendar.
Yesterday, the broader market posted fresh 23-month highs, spearheaded by retailers and semiconductor makers. Shares of chip company Broadcom (AVGO) climbed double-digits—lifted by an upbeat analyst note—and the PHLX Semiconductor Index (SOX) gained more than 3% to end near a two-year high. Transportation companies also rallied. The benchmark 10-year Treasury yield showed some resiliency early in the day but finished off its highs near 4.23%.
CPI check: On an annual basis, CPI rose 3.1% in November, down from 3.2% in October and in line with analysts’ forecasts, according to Trading Economics. The core annual rate of 4% was unchanged from October and met Wall Street’s expectations.
The 3.1% reading was the lowest in five months for headline CPI, reflecting lower energy costs in November versus the previous month. Food and shelter prices gained less quickly in November than in October, the government reported, but growth in shelter costs remains high from a historic basis. Gasoline prices helped offset the rise in shelter costs to keep the headline tame.
Used car prices continued to fall, while food costs rose 2.9%, down from October’s 3.3% increase. Costs for medical care commodities and transportation services rose sharply in November.
Inflation data and the Fed could help set Wall Street’s tone heading into 2024. Thursday’s November Retail Sales report also looms as several recent reports indicate solid holiday shopping demand
Eyes turn toward the updated Fed “dot plot” of rate projections tomorrow to see if policy makers dial in additional cuts for next year, and whether they trim their 2024 inflation growth outlook. Powell’s recent remarks edged toward hawkish after a note of optimism in his November 1 post-FOMC press conference. Powell is in a tough place; even if he tries to sound neutral, investors might read that as a reason to buy Treasuries.
The 10-year Treasury note yield is down around 70 basis points since late October, roughly the equivalent of three 25-basis point rate cuts by the Fed. When Treasury yields hit 16-year highs in September and October, Fed speakers noted that the market was doing some of the Fed’s tightening work for it, putting less pressure on policy makers to raise rates. Now, it’s arguable the Treasury market is doing the Fed’s loosening work for it, meaning policy makers might not feel as much pressure to trim. Especially in the light of last week’s positive jobs report where unemployment dipped to 3.7%.
Back in September, FOMC policy makers projected rates to finish 2024 at a target range of 5% to 5.25%, down just 25 basis points from current levels. Futures trading bakes in about 100 basis points of rate cuts next year.
Price check: Before the FOMC meeting ends, investors get a look at November Producer Price Index (PPI) data Wednesday morning.
For PPI, analysts expect the following, according to Trading Economics:
Producer prices generally retreated more quickly than consumer prices over the last year but haven’t had as much impact on the market. Still, they can be a good barometer of future consumer conditions because wholesale prices indicate what companies pay for raw materials. These savings sometimes get passed along to consumers down the road.
Thursday features rate decisions from the Bank of England (BoE) and the European Central Bank (ECB). Neither is expected to change policy, analysts say.
In what could be a preview of Q4 tech earnings season starting next month, solid quarterly performance by Oracle (ORCL) wasn’t enough to please investors. Shares plunged more than 9% in premarket trading after the computer technology company announced a small beat of analysts’ earnings per share (EPS) estimates and a slight miss on revenue.
The revenue miss was small (about $10 million on overall revenue of $12.94 billion), but with valuations historically higher than normal across the sector, it appears Wall Street wants more pristine outcomes. Consider this when some of the mega-cap tech firms step up to the plate later in January because there’s a track record of Wall Street punishing companies for delivering mid-grade rather than high-octane earnings results.
This goes beyond tech, by the way. The overall market is now priced above historic averages.
Tough day for toys: Another stock under pressure this morning is toy maker Hasbro (HAS) after it announced plans to reduce its workforce by nearly 20% in a cost savings move. The company cited persistent weakness in toy and game demand, the Wall Street Journal reported. Mattel (MAT) shares fell, too, as investors fretted about what Hasbro’s announcement might mean for toy sales this holiday season. Some popular toys and games made by Hasbro include Monopoly, Play-Doh, and Dungeons & Dragons.
Early today, futures trading pegged chances at 98% of the FOMC holding its benchmark funds rate steady following this week’s meeting, according to the CME FedWatch Tool. Chances of rates staying on pause following the FOMC’s January 30–31 meeting are 94%. The market prices in a 45% chance that rates will be lower after the Fed’s March meeting.
Look ahead: What can investors expect in 2024? The Schwab Market Outlook podcast from Liz Ann Sonders and Kathy Jones, Schwab’s chief investment strategist and chief fixed income strategist, covers both stocks and fixed income as well as offering thoughts on Fed rate policy
Ideas to mull as you trade or invest
Out of step: During and after the pandemic, most central banks moved in sync: first to cut interest rates and then to jack them up as inflation swelled around the globe. Investors expect rate cuts in 2024 from the central banks of the United States, Europe, Canada, and the U.K., but not all at once. The prime question is who jumps in the pool first. After last week’s bountiful U.S. jobs report, investors pushed back chances for a first Federal Reserve rate cut to May from March. But the economy in Europe hasn’t been as firm, turning attention toward the European Central Bank (ECB) and what tone its policy makers take this Thursday at their meeting. “Everyone had assumed the Fed would take pole position on cuts, but with the economic weakness prevalent in Europe, it might be the ECB or BoE that starts cuts, and we may be second movers,” says Joe Mazzola, director, trader education, at Schwab. “We may see countries moving at a different clip with some spillover into currency markets and equity markets too.” For instance, if European central banks cut rates before the Fed, it could cause more firmness in the U.S. dollar, perhaps with headwinds for large-cap U.S. companies doing business overseas. The central bank outlier might be the Bank of Japan (BoJ), which still hasn’t raised rates. Its next decision is December 19, and Bloomberg reported Monday that BoJ officials don’t seem to be in a rush to change policy.
Roll on: The economy-wide U.S. recession some economists expected in 2023 never showed up, though some don’t rule it out for 2024. Instead, there’s been a “rolling” recession affecting various parts of the economy, and that’s likely to continue next year. Housing, manufacturing and several consumer-oriented metrics experienced what might be called “hard landings,” and there’ve been recession-like declines in things like consumer confidence, consumer sentiment, and CEO confidence, though neither corporate earnings nor consumption got hit. “There was, and continues to be, offsetting strength in services, although even services, of course, haven’t been fully immune to the cycle, says Schwab’s Sonders. “Looking ahead to 2024, we view the best-case scenario as a continued roll-through with any subsequent possible hard-landing-level weakness in services, ideally, obviously being offset by some recovery in the already-hit segments.”
Training wheels off: Encouragingly, Monday’s Wall Street advance came without much help from so-called “mega-caps,” most of which lost ground. “There continues to be rotation, allowing some other stocks and sectors to participate, and that’s probably a good thing,” Schwab’s Mazzola said. About 85% of S&P 500 shares now trade above their 50-day moving averages, a sign of better breadth in the market. And sectors like financials and real estate—which got punished earlier this year—helped lead recent gains. As of Monday, 97% of S&P 500 financial stocks and 100% of real estate stocks traded above their 50-day moving averages. Meanwhile, tech is the eighth-best sector performer over the last month and communication services is 10th. From a high-level standpoint, it’s healthier to have gains across the market rather than concentrated in a couple of sectors or a handful of mega-cap firms. The question is whether this new interest in non-mega-caps can last.
Dec. 13: FOMC rate decision, November PPI and expected earnings from Adobe (ADBE).
Dec. 14: November Retail Sales and expected earnings from Costco (COST) and Lennar (LEN).
Dec. 15: November Industrial Production, November Capacity Utilization, and expected earnings from Darden Restaurants (DRI).
Dec. 18: No major earnings or data expected.
Dec. 19: November Housing Starts and Building Permits, expected earnings from FedEx (FDX).
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Charles Schwab & Co., Inc. (“Schwab”) and TD Ameritrade, Inc., members SIPC are separate but affiliated subsidiaries of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank.
Wall Street shows little initial reaction to CPI as inflation looks relatively tame
FOMC meeting begins today, with no rate move expected but focus on 2024 projections
Earnings calendar starts to pick up as investors look ahead to Costco, Lennar, Adobe
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