Markets Brace for CPI, “Big Week of Data”

Stocks traded flat today, shaking off the initial concerns following Moody’s decision to downgrade the U.S. credit rating outlook from stable to negative. The Dow gained 91 points, an increase of 0.27%. Meanwhile, the S&P hovered around break-even while the Nasdaq Composite dipped slightly by 0.2%.

Leading the charge in the S&P 500 were DaVita, Insulet, and Henry Schein, each climbing more than 7%. Boeing also contributed to the Dow’s uplift, soaring over 4% after Emirates announced a whopping $52 billion order for 95 aircraft.

Moody’s announcement on Friday highlighted the U.S.’s “very large” fiscal deficits and the political deadlock in Washington as key reasons for the downgrade. Despite this, the agency maintained America’s AAA credit rating, the highest possible level. This move comes on the heels of Fitch’s earlier decision to lower the U.S. long-term foreign currency issuer default rating to AA+ from AAA, citing similar concerns about fiscal deterioration and political impasses.

Treasury yields remained flat, allowing traders to look past the downgrade in the equity market. Stocks initially fell on the news early Monday morning but later recovered.

Greg Bassuk, CEO of AXS Investments, commented, “We’re seeing investor reaction to the Moody’s downgrade, but we’re also seeing skittishness around some big developments pending this week. We think all eyes are focused on this week’s inflation data and the resulting Fed policy.” Bassuk anticipates continued market volatility through the end of the year, exacerbated by ongoing global conflicts and mixed economic data, dubbing it “the Grinch fueling the Christmas rally this year.”

Investors are now bracing for the release of fresh U.S. inflation data, with the consumer price index update expected Tuesday.

This week promises a departure from last week’s focus on Federal Reserve commentary, with a slew of important data and events on the horizon. The spotlight is on Tuesday’s U.S. CPI, but U.S. retail sales on Wednesday will also significantly influence Q3 GDP forecasts. Other key U.S. releases include PPI on Wednesday and various housing data later in the week. Additionally, the NY Fed’s 1-year inflation expectations report is due today. The potential U.S. government shutdown looming on Friday adds another layer of uncertainty.

The APEC economic leaders’ summit, running in San Francisco until Friday, is another event to watch, especially for the anticipated bilateral meeting between Xi and Biden on Wednesday. Already, there are reports of China potentially resuming purchases of Boeing’s 737 jetliners, signaling a thaw in relations.

China is also set for a major data release on Wednesday, while Europe will see the second print of the EA Q3 GDP, the ZEW survey (a German economic projections report), and UK employment and inflation updates. Moody’s is scheduled to conclude its review of Italy’s credit rating on Friday, currently on a negative outlook and just a notch above high-yield territory.

In a more unusual development, Iceland has declared a state of emergency following a series of powerful earthquakes, raising concerns about a major volcanic eruption. However, favorable wind patterns seem to have mitigated the risk to airline travel. This is a relief, as some unlucky travelers may recall being stranded in airports across the world during the last major Icelandic eruption in 2010.

Focusing on the U.S. CPI data due tomorrow, economists expect a modest increase of +0.1% month-over-month due to softer energy prices. They predict the core CPI to edge up to +0.4% from +0.3% last month (consensus at 0.3%). If these predictions hold, the year-over-year rate would be 3.3% and 4.2%, respectively, slightly higher than the consensus for the core rate.

Deutsche Bank also forecasts Wednesday’s PPI to show a headline increase of +0.2% (down from +0.5%) and a steady core at +0.3%, with a keen eye on components that directly influence the Fed’s preferred core PCE, like healthcare services and airfares.

U.S. retail sales, also due Wednesday, are expected to be weak, with Deutsche Bank predicting a -0.4% headline change (down from +0.7%), mirroring the forecast for sales excluding autos (down from +0.6%) due to lower gasoline prices. Retail control, a component of GDP, is anticipated to show a modest +0.1% increase (down from +0.6%), a significant drop from the annualized +6.8% growth seen in Q3.

The market’s expecting relatively muted data, which means that if we do see a big surprise (either hot or cool) from the CPI tomorrow, stocks could respond with a major move.


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