DRIVER: An easing inflation and interest rate shock is most important of the three catalysts we see for 2023. Ahead of China going-for-growth and a less-bad tech view. US inflation is the world’s most important number. It drives all else, from Fed rate hiking outlook to recession risks and the earnings outlook. This made ‘CPI day’ typically the most volatile of 2022, with a 2% average S&P 500 price swing. Consensus for Thursday’s December CPI report is a positive 6th straight headline slow down to 6.5%. Our tracker (see chart) gives more reassurance underlying price pressures are easing. This relief would add more fuel to the year’s positive market start.
INFLATION: A positive December inflation report is supported both by our inflation tracker and the signs of lower wage rises in last week’s payrolls report. This would validate market’s pricing (80% chance) of a slower Fed’s hiking pace, to 0.25%, at its Feb. 1st meeting. But risks remain, with the Cleveland Fed inflation NOWCast model above consensus, core inflation pressures still high, and the Fed’s latest ‘dot plot’ calling for higher inflation and interest rates than the market.
TRACKER: Reported US inflation is by definition a lagging indicator. Our tracker uses forward and coincident figures, and shows easing pressures. These are down a median 24% from peak. And 5% from November with 11 of 14 indicators down. We track six of the main segments: the labour market (employment ISM, JOLTS), housing (Zillow rent, NAHB index), goods (Used cars, Manufacturing ISM prices), commodities (Gasoline, broad commodities), supply chains (Fed’s supply chain index, container rates), and inflation expectations (Michigan survey, Break-evens). Supply chains, housing, and goods prices lead the fall, with the labour market lagging as usual.
All data, figures & charts are valid as of 10/01/2023