A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can apply right here.
Maybe it’s the new year. But for investors, consumers and the Federal Reserve, inflation remains the top economic concern, just as it was in 2022.
With that in mind, Wall Street will be scrutinizing December’s consumer price index data due on Thursday. We hope that the pace of price increases will continue to slow.
Consumer prices rose 7.1% year-on-year through November. That’s still a historically high increase, but it’s a noticeable drop from June’s peak price increases of 9.1%. It was also the smallest increase since the annual price jump of 7% in December 2021.
We hope that inflationary pressures will ease even more dramatically as the year progresses. It is probably a pipe dream to expect that inflation will soon fall to the 2% to 3% annual level at which the Fed would feel most comfortable. But as long as the CPI continues to fall, the market is likely to cheer.
“Inflation will continue to rise. We believe inflation peaked in June,” Nancy Tengler, managing director and chief investment officer of Laffer Tengler Investments, said in the report.
Tengler added that “the rise and fall of inflation is mostly symmetrical. It took 16 months to peak and now we expect it to take the same amount of time to reach a tolerable level.”
Any further slowdown in the pace of inflation would be good news for average Americans, but also for corporate America. This is because profits should increase as commodity costs decrease.
“With a year of higher inflation behind us, we expect the tailwinds of inflationary pressures to become tailwinds as companies begin to see deflation in input costs. Margins are likely to hold up better than the overall market expects,” said Brett Ewing, chief market strategist at First Franklin, in a report.
Moreover, lower inflation levels should allow the Fed to continue to slow the pace of rate hikes. Traders are hoping for just a quarter-point hike from the Fed next month … and are betting the Fed will eventually stop raising rates later this year.
Rising expectations for a Fed break have raised the prospect that the US economy could avoid a deep and prolonged recession. Many experts still think a short and shallow decline is likely. But that will depend on how aggressive the Fed decides to be with rate hikes.
“The Fed could blink and agree to an inflation rate of 3% to 4% ‘for now,’ with a soft landing possible,” said Bob Doll, chief investment officer at Crossmark Global Investments, in a report.
It would also be welcome news for people still looking to buy a home.
Concerns about rising mortgage rates (along with sky-high home prices in many markets) fueled fears of another housing bust like the one in the late 2000s. But if inflationary pressures continue to ease – and the Fed acknowledges this by pulling back on rate hikes – then the housing market could recover.
“The mortgage market is already pricing in two (or more) more rounds of rate hikes as inflation eases,” Phillip Wool, managing director and head of investment solutions at asset management firm Rayliant, said in the report.
“As uncertainty eases from current highs, the corresponding risk … should dissipate, lowering mortgage rates and marginally improving affordability,” Wool added, arguing that “we simply don’t see a crash” in the housing sector.
Avoiding the worst-case scenario in the housing sector would be particularly good news for banks. Several of the nation’s largest lenders will report fourth-quarter earnings on Friday.
To exit: The results of JPMorgan Chase ( JPM ), Citigroup ( C ), Bank of America ( BAC ), Wells Fargo ( WFC ), and BNY Mellon. (BK) Investors will be anxious to see how the mortgage business at these banks holds up in light of last year’s huge rate hike.
The market will also be listening for any signs of optimism from bank CEOs about housing and the broader economy. Gloomy comments from JPMorgan Chase CEO Jamie Dimon and Goldman Sachs ( GS ) CEO David Solomon spooked traders last month.
Bank stocks, like most of the rest of the market, have done poorly in 2022. Higher rates have reduced demand for credit. But big banks have also been hit by a slowdown in merger activity and initial public offerings. The lack of jobs has led to a drop in investment banking’s lucrative fees.
Volatility on Wall Street has also been a major problem for the asset management units of leading financial firms. iShares ETF owner BlackRock ( BLK ), which will also release its latest numbers on Friday, has been hit particularly hard.
BlackRock had more than $10 trillion in assets under management at the end of the fourth quarter of 2021, a record level. Due to market turmoil last year, that number has fallen to less than $8 trillion by the third quarter of 2022.
With the market rebounding in the fourth quarter — the S&P 500 gained 7% in the final three months of the year thanks to a hot October and November for stocks — Wall Street will be watching to see if more investors will pour money into BlackRock’s passive index funds at the end of 2022.
Monday: German industrial production; earnings from Tilray (TLRY), PriceSmart (PSMT) and WD-40 (WDFC)
Tuesday: inflation in Japan; UK retail; earnings from Bed Bath & Beyond (BBBY)
Wednesday: the annual report of the World Economic Forum on global risks; earnings from KB Home (KBH)
Thursday: US CPI; Weekly US Jobless Claims; inflation in China; earnings from Taiwan Semiconductor (TSM) and Tesco (TSCDF)
Friday: US U. of Michigan Consumer Sentiment; data on Chinese trade; Germany 2022 GDP; UK monthly GDP; earnings from UnitedHealth (UNH), JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Delta (DAL), BlackRock and BNY Mellon