This morning, the BLS released its November Core Price Index, showing a 7.1% year-over-year inflation rate.
This was below the 7.3% that the market expected.
This “cooling” inflation level leads many on Wall Street to anticipate that the Federal Reserve will be less concerned about inflation, and therefore less aggressive about raising interest rates.
As a result, stocks immediately popped 2-3% on the CPI report.
Why I’m concerned…
By 10:30 am ET this morning, an hour after the opening bell, the S&P 500 had given back over half of its initial gains.
This lack of follow-through (at least initially) tells me that we are missing the two things that drove the market rally following last month’s CPI report: Short-covering and FOMO (fear of missing out) by hedge funds who had spent most of 2022 in a defensive posture and were forced to switch by the encouraging downtick in inflation last month.
Yes, 7.1% inflation is still down from last month, and lower than overall expectations – but 7.1% is still not a great number.
And that’s what I’m guessing the FED is thinking as well.
After spending all of 2021 ridiculously claiming that inflation was “transitory”… I don’t think they want to be seen as being weak on inflation again.
So I believe they’ll err to the aggressive side on interest rates.
I expect that tomorrow we’ll see the full 50 basis point increase that the market expects, and very little in the way of “pivoting” language from Powell.
This “reality check” from the FED could disappoint investors, and cause the market to give back all of its recent gains and then some… likely resuming the yearlong downtrend in stocks that has plagued the market.
I hope I’m wrong, but I believe caution is warranted from here.
Risk to the downside through the end of 2022, with an increase in volatility likely from today’s low levels.