Wall Street Traders Hold Their Breath Before CPI: Markets Wrap

As Wall Street gears up for important economic news, traders find themselves in a cautious state. On a day filled with zigzagging stock prices, market participants refrained from making major moves ahead of the Consumer Price Index (CPI) report, which is critical for understanding the Federal Reserve's future interest rate policies.

The S&P 500 ended the day slightly higher, closing 0.1% up. Even though most stocks rebounded, the technology sector faced additional challenges. According to Citigroup's Stuart Kaiser, this upcoming CPI day is expected to be the most active since March 2023, with predictions suggesting that the S&P 500 may swing by as much as 1% in either direction.

“All eyes are now on Wednesday’s CPI report, which could be one of the most significant inflation readings lately, greatly influencing the market’s Fed-focused mindset,” said Chris Brigati from SWBC. He explained that a strong inflation figure could indicate no interest rate cuts are coming in 2025 and might even lead to a rate hike. Conversely, a weaker report might ease concerns in the market regarding the Federal Reserve's decisions.

Recent data released on Tuesday revealed that the Producer Price Index (PPI) unexpectedly decreased in December, aided by falling food prices and stable service costs. However, some elements contributing to the Fed’s preferred inflation measure, the personal consumption expenditures (PCE) index, showed mixed results.

“This implies that neither the Fed nor the markets will benefit from particularly favorable PPI data for the PCE as they did back in November,” stated Krishna Guha from Evercore. “Consequently, markets are exposed to volatility surrounding Wednesday’s CPI report.”

The day saw fluctuations in key stock indices. The S&P 500 managed to close above its 100-day moving average after dipping below it briefly. The Nasdaq 100 fell slightly by 0.1%, while the Dow Jones Industrial Average increased by 0.5%. The performance of the major tech stocks, encompassed in the “Magnificent Seven”, saw a decline of 1%, whereas small firms represented by the Russell 2000 index rose by 1.1%. Additionally, homebuilders experienced a positive day following KB Home's strong earnings report, but Eli Lilly & Co. faced a significant decrease of 6.6% due to disappointing sales figures.

Meanwhile, the yield on 10-year Treasuries remained mostly stable at 4.78%. The U.S. dollar weakened after news broke that Donald Trump’s incoming economic team is contemplating gradual tariff increases, which could help prevent inflation from spiking.

In terms of energy, oil prices fell from a five-month high following news of a tentative ceasefire between Hamas and Israel, reducing concerns about supply threats from Russian and Iranian sources.

Crypto markets also faced challenges, with Bitcoin’s value dipping as Federal Reserve policy insights impacted trading sentiments. Despite expectations of only a slight cooling in inflation towards 2024, the solid job market continues to support the Fed’s cautious stance regarding rate cuts.

The core CPI, excluding food and energy, is projected to rise 0.2% in December, a decrease from the four previous months which saw a 0.3% rise each time. The year-on-year increase for the core CPI is expected to stabilize at 3.3%, consistent with the previous months.

A recent survey from 22V Research indicated that 47% of investors believe the market reaction to the CPI will be “risk-off”, while 29% expect it to be “risk-on”. Additionally, 53% think that financial conditions need to tighten in light of the current economic climate.

“For the U.S. economy to reach a state of balance, involving core PCE nearer to 2% and full employment, there may be a need for higher interest rates or tightened financial conditions,” commented Dennis DeBusschere from 22V.

As Wall Street anticipates the unofficial commencement of earnings season, major bank results are also due. Financial powerhouses like JPMorgan Chase & Co. and Wells Fargo & Co. are expected to showcase steady earnings from trading and investment banking, which could counterbalance declining net interest income resulting from higher deposits and sluggish loan demands.

“For big-bank earnings, the key figure to monitor is net interest income,” emphasized Brigati from SWBC. “If these banks can capitalize on borrowing at lower rates compared to their loan portfolios, it would signify a positive outlook for the approaching year.”

Corporate Highlights

• Southwest Airlines Co. is halting hiring for management and headquarters roles as part of new cost-cutting measures following board disputes with the activist shareholder Elliott Investment Management.

• Meta Platforms Inc. is set to let go of around 5% of its staff, based on performance reviews, and plans to refill those positions later this year.

• CVS Health Corp, Cigna Group, and UnitedHealth Group Inc. have been reported by the Federal Trade Commission for charging significantly higher than the average national costs for numerous specialty generic drugs, netting over $7.3 billion in excess revenue over a six-year span.

• B. Riley Financial Inc. is facing increased scrutiny from federal regulators regarding its activities with the now-bankrupt Franchise Group as well as a personal loan involving its co-founder and Chairman.

• Capital One Financial Corp. misled its customers by promoting a new savings account with a better interest rate without extending the same offer to existing accounts, leading to allegations from the Consumer Financial Protection Bureau.

• United Rentals Inc. is acquiring H&E Equipment Services Inc. in a deal valued at $3.4 billion, aimed at expanding its equipment fleet for construction and industrial sectors.

• Country Garden Holdings Co. has reported yet another record loss for 2023 amid ongoing restructuring efforts after defaulting on debt.

Key Events This Week

• Eurozone Industrial Production - Wednesday

• Financial Earnings from Citigroup, JPMorgan, Goldman Sachs, Bank of New York Mellon, Wells Fargo, and BlackRock - Wednesday

• US CPI and Empire Manufacturing Data - Wednesday

• Speeches from Fed's John Williams, Tom Barkin, Austan Goolsbee, and Neel Kashkari - Wednesday

• TSMC Earnings Report - Thursday

• ECB to Release Account of December Policy Meeting - Thursday

• Financial Earnings from Bank of America and Morgan Stanley - Thursday

• US Initial Jobless Claims, Retail Sales, and Import Prices - Thursday

• China's GDP, Property Prices, Retail Sales, and Industrial Production Data - Friday

• Eurozone CPI - Friday

• US Housing Starts and Industrial Production Data - Friday

WallStreet, CPI, Markets