After Hitting a Nearly One-Month High, Major Indexes Face Test with Tomorrow's Inflation Data

(Wednesday Market Open) There’s plenty of potentially market-changing news packed into the next 48 hours. If you’ve been on break, December’s Consumer Price Index (CPI) arrives tomorrow before the open, and on Friday, the nation’s largest banks will cut the ribbon on what could be an earnings season to remember.

However, if you’ve been on the clock with the rest of us, you’ll also be waiting for tomorrow’s Weekly Initial Jobless Claims number and fresh commentary from Fed speakers with early January’s University of Michigan Consumer Sentiment Index to close the week.

We mention this because not much news is on the schedule today. The market may trade without much conviction amid an apparent lack of major catalysts, but we might see some repositioning going on ahead of Friday’s start to the Q4 earnings season with major bank results. The one data highlight this morning was a slight uptick in weekly mortgage applications, which could be a sign of pent-up demand as interest rates moderate, though one week isn’t a trend.

Just after yesterday’s close, Wells Fargo WFC dropped a bombshell that it plans to downsize the U.S. home mortgage business it once dominated in light of rising rates and continued regulatory scrutiny. WFC, the company’s No. 1 mortgage lender as late as 2019, will continue to offer home loans only to existing bank and wealth management customers and borrowers in minority communities.

In other news, many U.S. flights are grounded this morning due to a computer outage at the Federal Aviation Administration (FAA). Airline stocks traded lower in premarket action. Delta Air Lines DAL is scheduled to be the first major airline to report Q4 earnings early Friday and expectations are strong after the airline raised guidance last month.

Morning Rush 

• The 10-year Treasury yield (TNX) is down slightly at 3.58%.
• The U.S. Dollar Index ($DXY) is up slightly at 103.4.
• Cboe Volatility Index® (VIX) futures are near yesterday’s lows at 20.75.
• WTI Crude Oil (/CL) rose 0.6% to $75.63 per barrel.

Crude is getting some support this week from anticipation that demand from China might improve as the economy there continues to reopen. The wildcard, of course, is COVID-19, Media reports about dramatically rising case counts raise questions about how soon China’s commodity demand can rebound.

Stocks on the Move

KB Home KBH, one of the nation’s top 10 homebuilders, gained 1.28% yesterday and is up in premarket trading ahead of quarterly earnings expected after the close. This could be a chance to get a closer view at how rising mortgage rates are affecting home demand. Consensus from Briefing.com is for earnings per share (EPS) of $2.85 and revenue of $1.98 billion.

Bed Bath & Beyond (BBBY) shares advanced more than 27% in yesterday’s trading—to $2.07 per share. The beleaguered home goods retailer—which recently announced it was approaching bankruptcy—issued a “going concern” warning.

Data Docket

What accounted for Tuesday’s late optimism that led to the highest close for the S&P 500® index (SPX) in nearly a month? Many analysts believe that the December CPI may come in cooler than expected. The stakes are high for Thursday’s report as the February 1 date of the next Fed rate decision grows closer.

After slowing for the fifth straight month to an annual rate of 7.1% in November, the consensus for December’s headline figure is now at 6.5%. Core CPI—which omits more volatile price movements from food and energy—is expected to come in at an annual 5.7%.

The closely watched month-over-month CPI change is expected to be flat for headline CPI and up 0.3% for core CPI, according to consensus from Briefing.com. That compares with 0.1% and 0.2%, respectively, in November.

Slowing price growth, for a change, is something both the Fed and the average consumer will likely consider good news. However, as the minutes to CPI tick down today, the message from central bankers is that rates may have to move above 5% before they can contemplate a move down.

Getting there could be a bit slower—and potentially a bit less painless for borrowers. By late Tuesday, the CME FedWatch Tool held steady with a 78.2% chance of a 25-basis-point rate at the next meeting.

The Fed’s continuing to watch the jobs market closely. Tomorrow’s Weekly Initial Jobless Claims consensus is seen at 210,000, according to Briefing.com. That’s up from 204,000 a week earlier but still historically low. We’ve seen a lot of layoff announcements lately from big corporations, but claims haven’t inched up lately. 

Reviewing the Market Minutes

Despite one more Federal Reserve leader declaring the central bank has “more work to do” against inflation—a frequent trigger for market retreats—all major indexes posted gains by the close.

The VIX finished close to 20 before edging slightly higher this morning in futures trading.

Federal Reserve Governor Michelle Bowman said in prepared remarks for an event in Miami yesterday that she wants to see “compelling signs” that inflation has peaked with “consistent” evidence that it’s headed downward before the Fed stops raising rates. Earlier in the day, Fed Chairman Jerome Powell addressed an audience in Stockholm for his first speech of 2023 without many specifics other than to offer that central banks fighting the inflation dragon “can require measures that are not popular in the short term as we raise interest rates to slow the economy.”

Back home, the Nasdaq Composite®($COMP) managed to close higher for the third day in a row and the SPX closed above its key 3,900 mark—a resistance level that could indicate more stability going forward. $COMP gained 1.01% by the close as investors embraced technology leaders like Apple (AAPL), Amazon (AMZN)—up nearly 3% on the day—and NVIDIA (NVDA).

Here’s how the major indexes performed Tuesday:

• The Dow Jones Industrial Average® ($DJI) gained 0.56%, up 186.45, to end at 33,704.10.
• The $COMP gained 106.98, or 1.01%, to finish at 10,742.63.
• The Russell 2000® (RUT) advanced 26.74, or 1.49%, to close at 1,822.65.
• The SPX added 27.16, or 0.70%, moving to 3,919.25 by the end of the session.

Three Things to Watch

Storm Watch: Yesterday, chief executive/economic weather prognosticator Jamie Dimon downgraded his comments from last spring about an economic “hurricane” to some “storm clouds.” However, the JPMorgan Chase (JPM) chief executive seeded another downpour saying the Fed may have to raise rates to 6% to defang inflation, which is even higher than the 5% level two Fed members suggested this week. Dimon told the Fox Business channel that the central bank should go to 5% and take a pause to see if prices are easing. If the picture isn’t improving, the Fed could resume tightening in this year’s fourth quarter. Dimon added that inflation’s path in the coming months isn’t likely to be a predictable one—he told the network, “Inflation won’t quite go down the way people expected…But it will definitely be coming down a bit.”

World Watch: On the subject of rates—and potential recession—the World Bank said yesterday it expects global GDP growth of 1.7% in 2023, the slowest pace since 1993 with the exception of the 2009 and 2020 recessions. In its last Global Economic Prospects report in June, the development bank forecasted global GDP growth at 3.0%. The bank said, “Given fragile economic conditions, any new adverse development—such as higher-than-expected inflation, abrupt rises in interest rates to contain it, a resurgence of the COVID-19 pandemic or escalating geopolitical tensions—could push the global economy into recession.” Notably, growth in China is projected to pick up this year to 4.3% with the lifting of its COVID-19 restrictions, but the report noted that the forecast is down from last summer with the nation’s continuing problems in real estate, manufacturing, and global demand.

Energy Watch: The Energy Information Administration’s (EIA) monthly Short-Term Energy Outlook reported yesterday that the United States is expected to dominate all non-OPEC oil growth next year. Bloomberg noted that for 2024, crude production is forecast to reach 12.8 million barrels per day, topping 2019. U.S. drillers have picked up the pace, and in 2023 production is expected to reach 12.4 million barrels.

Notable Calendar Items

Jan. 12: December CPI and expected earnings from Delta (DAL) and Taiwan Semiconductor (TSM)

Jan. 13: January University of Michigan Consumer Sentiment and expected earnings from JP Morgan (JPM), Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC)

Jan: 16: Dr. Martin Luther King, Jr.’s birthday observance. Markets closed.

Jan. 17: January Empire State Manufacturing and expected earnings from Goldman Sachs (GS) and Morgan Stanley (MS)

Jan. 18: December Retail Sales and Producer Price Index (PPI)

Jan. 19: December Housing Starts and Building Permits, Philly Fed Manufacturing Index, and expected earnings from Procter & Gamble (PG), Netflix (NFLX), and American Express (AXP)

Jan. 20: Existing Home Sales and expected earnings from Schlumberger (SLB) and State Street (STT)

Jan. 23: Expected earnings from Baker Hughes (BKR) and Steel Dynamics (STLD)

 

TD Ameritrade® commentary for educational purposes only. Member SIPC.

 

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