The Inflation Front | January 13, 2023

AUTHOR: Jason Roque, MS, CFP®, APMA®, AWMA®
TITLE:       Investment Adviser Rep – CCO
TAGS:   S&P 500, NASDAQ, Inflation, Consumer Sentiment

Inflation fell for the fifth month in a row in December. Is peak inflation in front of us or behind us?

Monday   S&P 500 0.08% | NASDAQ 0.63%

There was a healthy surge to open the week. The S&P 500 rose over 1.2% intraday. That faded throughout the afternoon to leave the S&P 500 breakeven. The weekend headline risks caused little to sway markets in one way or another. This resulted in not much of a day for equities.

Tuesday   S&P 500 0.70% | NASDAQ 1.01%

Markets moved north on Tuesday after spending most of the morning waffling back and forth. This came as Federal Reserve Board (FRB) Chair Powell reiterated sustaining higher rates to quell inflation. While the move is aggressive, it is no different than what they have been saying for months. The Markets took the morning to determine if they liked the news. Really, they did not like it; however, it is priced in at this point. As a result, it prompted no change from markets.

Wednesday   S&P 500 1.28% | NASDAQ 1.76%

There was green on the screen all day Wednesday. This has become a common theme the day before a major data release. Truly, however, expectations are for a milder inflation environment this spring. This could result in the FRB hitting their terminal rate sooner than later.

Thursday   S&P 500 0.34% | NASDAQ 0.64%

Markets caught a bid on Thursday as CPI data showed more weakness. CPI has now fallen 3.4% from its peak last summer. The quick move brings hope the FRB will not have to cause as much damage as was expected. Interestingly, there wasn’t an oversized move as has been the case the last few months. Much of the gains the last two days were related to inflation, so Wednesday’s bid was really affirmed on Thursday.

Friday   S&P 500 0.40% | NASDAQ 0.71%

The moves on Friday came despite long-term inflation expectations inching up to 3%. Additionally, consumer sentiment is projected to rise to 64 in January. The preliminary reading could mean the FRB got the soft landing for which they were hoping.

Conclusion   S&P 500 2.67% | NASDAQ 4.95%

Inflation was in focus this week. The CPI reading is a valuable tool in knowing what inflation has done. Little attention is paid to the University of Michigan’s 5-year inflation expectation reading. That reading tells us where people feel inflation will be 5 years from now. The FRB would like to keep those expectations as low as possible. If people expect higher inflation than businesses are free to implement those hikes, allowing inflation to become more embedded. Thus far, peak inflation has been 9.1% but it may surge again this spring with China’s reopening. Its peak has likely been reached. We need to see people’s future expectations of inflation fall for the FRB to regain confidence in its heading.

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