By Naveen Athrappully
The U.S. stock market jumped on Tuesday as the Consumer Price Index (CPI) data came in lower than expected, boosting investor expectations that inflation might ease down in the near future.
The 12-month CPI for November came in at 7.1 percent, down from 7.7 percent in October. It was the fifth straight monthly decline after the CPI hit a peak of 9.1 percent in June. This is the lowest rate since December 2021, and was below the market expectations of 7.3 percent. Stock markets responded to the inflation data positively, with the S&P 500 Index up by 0.52 percent, the Dow Jones Industrial Average by 0.11 percent, and Nasdaq by 0.72 percent, as of 1:17 p.m. EST.
Earlier, European markets had also rallied, with STOXX 50 jumping by 1.53 percent, CAC 40 by 1.42 percent, DAX by 1.34 percent, and the FTSE 100 by 0.76 percent.
In a note cited by Bloomberg, Andrew Tyler, an analyst at JP Morgan, pointed out that not only is inflation dissipating but also that its “pace is accelerating” as well.
“This would give increasing confidence in projections of headline inflation falling approximately 3 percent in 2023. Further, if inflation is at 3 percent, irrespective of the labor market conditions, it seems unlikely that the Fed would hold the terminal rate at 5 percent. Any Fed pivot will rip equities,” the note said.
According to Robert Frick, corporate economist with the Navy Federal Credit Union, cooling inflation will boost the markets while also taking pressure away from the Federal Reserve for raising interest rates.
In addition, this also acts as a “real relief” for Americans whose financial situation has been hurt by higher prices, he stated, according to CNBC.
Initially characterizing the economic inflation as “transitory,” the Fed maintained the benchmark interest rate at 0.25 percent at the beginning of the year. The central bank pushed it up to a range of 3.75–4.0 percent by November through six straight rate hikes, including four consecutive rate hikes of 75 basis points.
During a speech on Nov. 30, Fed Chair Jerome Powell indicated that though the central bank still plans to raise rates at its meeting on Dec. 13–14, the increase would likely be limited to 50 basis points instead.
Rate Hike and Recession
Expectations about the Fed keeping interest rates elevated to keep inflation under control have many investors worried as to how it will negatively affect consumer and business loans.
The rise in Fed’s benchmark rates pushes up borrowing costs like mortgage rates, which end up dampening mortgage demand. In the past year, mortgage rates have almost doubled, while home sales have dropped during the previous nine months. Some worry that high interest rates might push the U.S. economy into a recession in 2023.
“The Fed stayed too easy for too long, totally misreading inflation, and now they’ve tightened aggressively into the highest debt construct ever without accounting for the lag effects of these rate hikes, risking they’ll be again late to realize the damage done,” Northman Trader founder Sven Henrich noted in a tweet.
During an interview with CNN late last month, Bank of America CEO Brian Moynihan predicted that the American economy will undergo a “mild” recession in 2023 and that the housing market will take “almost two years” to adjust.
When President Joe Biden was recently asked by a reporter as to when he expects prices to get back to normalcy, he replied that he hoped it would happen “by the end of next year or much closer,” according to Breitbart.