The defining moment for the stock market arrives with the CPI and the decision of the Fed

The defining moment for the stock market arrives with the CPI and the decision of the Fed

(Bloomberg) — This is the week everyone has been waiting for. With the release of a key inflation gauge, the Federal Reserve’s interest rate decision, and comments from Chairman Jerome Powell afterwards, investors are finally hoping to get a clear view of what lies ahead for a market. stock market and an economy slaughtered in 2023.

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But after a tumultuous year in which the S&P 500 index posted its biggest annual loss since 2008, stock traders are ready for one sure thing in the coming sessions: more volatility.

Inflation reports have rattled equities all year, leaving markets to gauge the central bank’s likely policy path amid relentless rising prices. This week’s consumer price index reading is crucial as signs of lower inflation could support equities through the end of the year by tempering expectations of further inflation increases. Fed.

Over the past six months, the S&P 500 has averaged about 3% move in either direction on the day the CPI is released, according to data compiled by Bloomberg. This is the highest since 2009. The S&P 500 has fallen on seven of the CPI’s 11 reporting days this year.

The US central bank is expected to broadly increase by half a point after its December 14 meeting. Equity investors are therefore more focused on what Powell has to say at his press conference afterwards, looking for clues along the way. futures for interest rates. The Fed’s outlook for the US economy will also be a focus, along with any changes in central bankers’ rate projections.

Read more: Fed rate spikes dashed Wall Street hopes for 2023 cuts

Of course, global fund managers are hoping 2022 ends on a high note after the S&P 500 posted back-to-back monthly advances for the first time in more than a year in October and November. But betting on how things will turn out in the months ahead with the S&P 500 entering its first year of decline since 2018 is particularly difficult.

“Getting the right position is extremely difficult for investors right now,” said Erik Ristuben, chief investment strategist at Russell Investments. “Fed policy is really putting a damper on the stock market party until Wall Street is convinced that the central bank is about to end the rate hike.”

Investors’ lack of conviction heading into this key week is evident in options markets. The Cboe Volatility Index, or VIX, is down 80% of the days in the past 10 weeks ending Dec. 2. It’s only happened three other times since the so-called Wall Street Fear Gauge was created, data compiled by the Bespoke Investment Exposure collective.

“There’s this feeling that the VIX has fallen too low, given big events like the CPI data and the interest rate decision next week,” said Brent Kochuba, founder of the analytics service. SpotGamma. “People are starting to realize that maybe things have gotten a little too complacent.”

Meanwhile, demand for hedges against individual stock losses pushed Cboe shares’ put-to-call ratio to 1.5 on Wednesday – the highest level since 2001 and more than double this year’s average .

Pricing in the futures market shows that the Fed’s key rate peaked at around 4.9% in the first half of 2023. That means the Fed still has room to raise rates as it stubbornly tames prices students. Over the past eight rate hike cycles, the Fed continued to raise borrowing costs until they were above the CPI, according to Carson Investment Research.

A half-point hike on December 14 would leave the fed funds rate in a range of 4.25% to 4.5%. Meanwhile, Tuesday’s CPI report is expected to show the index fell to an annual increase of 7.3% in November, from 7.7% the previous month. But nothing is guaranteed. Inventories faltered on Friday after a hotter than expected report on producer prices.

“It’s definitely a tricky time for investors,” said Stephanie Lang, chief investment officer at Homrich Berg, whose firm recommends being defensively positioned in favor of consumer staples and healthcare companies. health. “If history is any indication of the Fed’s track record of overshooting, that makes us cautious on equities.”

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