Important CPI Inflation Reading Coming On Thursday: What Investors Should Expect

The SPDR S&P 500 ETF Trust SPY traded higher by 0.6% on Wednesday ahead of a critical consumer price index (CPI) inflation reading on Thursday morning.

Economists are expecting the U.S. Labor Department to report 6.5% CPI inflation in December, down from 7.1% in November and a peak of 9.1% in June. Economists are also projecting that core CPI inflation, which excludes volatile energy and food prices, gained 5.7% in December versus 6% in the previous month.

Related Link: Why Morgan Stanley Says S&P 500 Could Drop 23% To New Lows

The latest inflation reading comes after the Federal Reserve issued a 0.5% interest rate hike in December in its ongoing battle to bring down the highest U.S. inflation in roughly 40 years. The Fed has had some success in cooling down an overheating U.S. economy, but the market expects more interest rate hikes in early 2023.

Jobs And Wages: Earlier this month, the Labor Department reported the U.S. economy added 223,000 jobs in December, exceeding economist estimates of 200,000 positions. The Labor Department also reported wages were up 4.6% from a year ago and up 0.2% from November. U.S. GDP grew 2.6% in the third quarter, ahead of the 2.3% growth economists were expecting.

In addition to the CPI reading, investors will be watching closely on Friday when the University of Michigan releases its preliminary January U.S. Consumer Sentiment Index reading. Economists are expecting the index to tick higher from 59.7 in December to 60.5 in January.

Related Link: Is Inflation Tamed? S&P 500 Kicks Off Year Optimistically, But Still Bumps In The Road For Tesla

Voices From The Street: Nick Reece, VP of Macro Research & Investment Strategy at Merk Investments, said Wednesday that the December jobs report was mixed but relatively good ahead of the CPI reading.

"Notably, wage inflation (which the Fed is hyper-focused on) declined even with solid job gains—raising the prospect of inflation cooling without the need for a Fed-induced recession," Reece said.

"The CPI report later this week and the Employment Cost Index (ECI) at the end of the month will provide further relevant data."

DataTrek Research co-founder Nicholas Colas said Wednesday that Thursday's CPI reading could go a long way in closing the gap between the Federal Reserve's hawkish guidance for 2023 and the market's more dovish stance.

"Recent comments from Fed presidents have tried, and failed, to nudge the market’s view towards the FOMC’s guidance. Clearly, markets will need either a sterner message or a hot inflation number (CPI on Thursday, for example) to reset their expectations more in line with the Fed’s view," Colas said.

Benzinga's Take: Any surprises in the CPI reading on Thursday could trigger some extreme stock market volatility.

The bond market is currently pricing in a 77.2% chance of a 0.25% Fed interest rate hike on Feb. 1, but expectations could shift aggressively to another 0.5% rate hike if this week's CPI number comes in higher than expected.

Now Read: No IRS, No Income Tax? House Republicans To Vote On Bill That Would Allow Americans To 'Keep Every Cent Of Their Hard-Earned Money'

Photo: courtesy of Shutterstock.