CPI Week
Pump Coming?
We kick off 2023 with a market rally, which will be put to the test this week when investors face a highly-awaited inflation print (CPI) and the start of fourth quarter earnings season led by the big banks.
Key Events This Week:
1. Banks begin reporting Q4 2022 earnings
2. Fed Chair Powell speaks on Tuesday
3. Fed member Harker speaks on Thursday
4. December CPI released Thursday
5. Unemployment claims Thursday
6. Consumer sentiment Friday
Let’s talk briefly about each one.
Bank Earnings
Wall Street’s banking giants have seen precipitous drop-offs in dealmaking revenues, and have recently begun trimming their workforces. They’ll likely offer the Street disappointing results this season.
These reports aren’t due til Friday, however, so the market will have a whole weekend to digest balance sheets and comb through forward guidance statements. This earnings season is especially important because it will help shape Fed policy expectations. A broad upside surprise would allow the Fed to turn more dovish.
Credit delinquencies are reportedly below 2019 levels, which is a talking point for analysts arguing against a hard economic downturn. However, Wedbush analysts caution that loans are growing while deposits have been shrinking. This may be offset by increasing interest rates though, which boost net interest margins and overall profits.
Fed Speakers
Fed chair Jerome Powell and Patrick T. Harker from the Philly Fed are set to speak on Tuesday and Thursday. They are expected to reinforce the FOMC’s hawkish policy stance, but I’ll be on the lookout for any new thought-provoking statements. I’m interested to see if Powell acknowledges the silver lining of last week’s softer Services PMI print.
At the December FOMC press conference, Powell made it clear there would be more pain ahead for the economy. He’ll do whatever it takes to achieve the Fed’s 2% inflation goal. That includes tipping the economy into a recession as collateral damage for cooling off the labour market.
December CPI
Expectations:
US CPI +0.0% MoM; 6.5% YoY
US Core CPI: +0.3% MoM; 5.7% YoY
If the inflation readings comes in at or close to these expectations, this will show year-over-year price growth moderation and help solidify a 25bps Fed rate hike for February. The probability already stands at 75%. That’s good news for risk assets and likely why we’re seeing somewhat of a run up in anticipation.
The latest US jobs report showed that wage growth, a key factor in the inflation outlook, cooled in December. Additionally, a warm winter in the US has helped ease energy prices. These factors may lead to an encouraging CPI report.
Unemployment Claims
Jobless claims come out in tandem with the CPI numbers on Thursday and could help reinforce each other. The Fed is trying to cool everything off, so if unemployment turns in higher than expected it’s possible the market digests this in a positive way. The trend has been relatively sideways near historical lows throughout 2022.
Consumer Sentiment
Sentiment is a leading economic indicator, and positivity is good for the markets. This chart looks like it’s potentially bottoming out. However, if sentiment moves up strongly, that may create ongoing inflationary problems.
The recent uptick signifies that inflation and employment expectations are improving. A drop on the reading could still be interpreted as good news by Fed watchers.
That’s all for today! We’ll be back with some chart updates later in the week.
Jay Charles
Editor in Chief, The Trading Tank.
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