CPI Data Supports Cooling Inflation Trend

Recession risk remains ahead of Fed’s decision.

Stocks rose Tuesday as data revealed inflation eased in November, stoking investor hopes that the Federal Reserve would take a dovish tilt in the months to come.  

Data from the Labor Department showed November’s consumer price index, a metric of how much consumers pay for goods and services, rose 7.1%, easing from the 7.7% reported the month prior. CPI is a key indicator used in determining the path ahead for rate hikes for Fed officials.  

Stocks initially surged, with the S&P 500 rising as much as 2.7% before paring gains and closing 0.7% higher. The Nasdaq rose 1% and the SPDR S&P 500 ETF Trust (SPY) and the Invesco QQQ Trust (QQQ) moved according to their underlying indices.  

The central bank is expected to announce a 0.5% interest rate increase Wednesday, after four consecutive hikes of 0.75%. That would bring the fed funds rate between 4.25% and 4.5%. While analysts and economists agree on the magnitude of the next hike, investors are looking for any indication of how long interest rates will remain elevated in the months to come.  

“We continue to believe that inflation will remain stubbornly high and above the Fed’s 2% target in 2023,” Gargi Chaudhuri, head of iShares investment strategy in the Americas, said in an emailed note. “Even with consecutive 0.1% month-over-month core-inflation prints next year, this doesn’t put us at the Fed’s YoY inflation target until late 2023 or early 2024.” 

Next year, Chaudhuri expects the Fed to “settle at a terminal rate of around 5% and keep policy rates higher for longer.” 

Still, other experts caution that the tempering of inflation indicated in the latest report may not be enough to mitigate the risk of an impending recession.  

“While inflation is moving to a better place, it is not yet in a good place,” said Mark Hamrick, senior economic analyst at Bankrate.com, in an emailed note. “A recession in 2023 is not a sure thing, but there’s broad agreement that the risks of one remain.” 

Other top ETF movers included the ProShares Ultra Bloomberg Natural Gas (BOIL), the VanEck Oil Services ETF (OIH) and the United States Natural Gas Fund LP (UNG), which rose 13%, 4.2% and 6.8%, respectively.  

Meanwhile, Brent Crude rose 3.4% to $80.67 on the CPI news and ongoing concerns of supply issues fueled by the shutdown of the U.S.Keystone crude pipeline. The gains follow a week where the global oil benchmark touched its lowest level since January of this year amid concerns of rapidly rising rates.  

Contact Shubham Saharan at [email protected]