US stock rally faces gauntlet of CPI data, Fed meeting

A double dose of potentially market-moving US events next week could set the tone for asset prices in the rest of 2022 and beyond, as investors brace for a key inflation report followed by the last Federal Reserve meeting of the year.

The S&P 500’s latest rebound stalled in the past week, as stronger-than-expected economic data fuelled concerns that the Fed will need to keep interest rates higher for longer in its bid to crush inflation, potentially bringing on a recession. The index has bounced about 10 per cent from its October lows but remains down more than 17 per cent on the year, reports Reuters.

Equities’ trajectory in the near future may depend on whether Tuesday’s consumer price index report shows inflation is responding to the most aggressive Fed hiking cycle since the 1980s. Hotter-than-expected data could bolster fears of more Fed hawkishness, pressuring stocks.

“If CPI comes in north of expectations or even doesn’t decline at all, that is not going to be market-positive,” said Tom Hainlin, national investment strategist at US Bank Wealth Management.

CPI reports have been catalysts for outsized swings in markets this year, with the S&P 500 moving an average of around 3 per cent in either direction over the past six CPI releases, compared with an average daily move of about 1.2 per cent over the same period.

That includes a Sept. 13 inflation release that sparked a 4.3 per cent sell-off and a Nov. 10 report showing softer-than-expected inflation that fuelled a 5.5 per cent rise and helped stocks extend their latest rally. A second helping of benign data could bolster the case for a peak in inflation and buoy equities further.

“Typically around the CPI reports it has been pretty volatile this year, and I don’t see a reason to think it still won’t be that way when we get the data next week,” said David Lefkowitz, head of US equities at UBS Global Wealth Management.

Meanwhile, investors are factoring in a half-percentage-point rate hike from the Fed next week, a step down from its recent series of three-quarter-point increases. With Wednesday’s rate action largely seen as a foregone conclusion, Wall Street will be focused on the central bank’s projections for how high rates will ultimately rise.

Also key will be Fed Chairman Jerome Powell’s views on inflation and the possibility that the economy can slip into recession next year – an idea that has filtered into asset prices and dominated investor thinking lately.