What Wednesday’s consumer-price index for December might reveal about the trajectory of inflation has traders and investors on edge. This information has the potential to significantly impact the stock and bond markets.
Because investors could be surprised by the CPI report in either direction, the stakes are high. According to the Wall Street Journal’s poll of experts, the annual headline CPI inflation rate, which dropped for six consecutive months from April to September 2024, is now expected to rise for a third consecutive month, from 2.7% in November to 2.9%. For the first time since July, only months before the Federal Reserve announced the first of its three rate cuts for 2024, this annual headline rate is predicted to surpass 3%.
Investors would be shocked by a headline CPI rate of more than 2.9% per year. However, the report’s specifics are just as important as this number, if not more so.
Chris Brigati, chief investment officer of Texas-based investment firm SWBC, said that while weak readings might help allay market investors’ fears, strong numbers on Wednesday could further solidify the notion that there won’t be any Fed rate cuts in 2025 and possibly even spark a hike. Brigati stated that the December CPI figure “may be the most important inflation reading in recent memory.” Brigati’s firm operates assets worth over $1 billion.
According to Michael Reynolds, vice president of investment strategy at Glenmede in Philadelphia, which oversees assets worth about $47 billion, he is very interested in the monthly core reading, especially what is referred to as core services excluding shelter, since it is a sticky aspect of inflation that is difficult to reduce. He thinks the stock and bond markets would be sufficiently agitated by a 0.5% level on the monthly core CPI, which is higher than the median estimate of 0.3% by economists.
“Any sign of a reacceleration in inflation is going to cause investors to re-evaluate what an appropriate yield is on Treasury securities, which could put upward pressure on those yields,” he stated by phone. He said that the stock market is becoming more and more reliant on Treasury yields, “so we could see a re-evaluation of the appropriate valuation levels on equities.”
The re-evaluation process could continue “until confidence is reanchored at a reasonable range around 2%” for inflation, according to Reynolds. If any acceleration in CPI inflation proves to be significant, he noted, a 10-year yield of 5% may be achievable. Furthermore, markets would keep lowering their expectations for additional central bank easing, with fed-funds futures “less likely to continue flirting with that second rate cut for 2025 if inflation becomes a problem.”
Some well-known companies, including Barclays (UK:BARC), have already raised the prospect that if President-elect Donald Trump’s proposed tariffs are implemented, the CPI may stall at about 3%. Even further goes Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management, located in Florida: According to him, his company, which manages assets worth about $1 billion, believes that this year’s CPI inflation rate would likely increase to 3.5% to 4%.
Additionally, strategists Chris Whelan, Andrew Kelvin, and Robert Both of TD Securities (TD) stated: “The prospect of rises in the United States has entered the discourse. Although it doesn’t seem like a real option to us, it does represent mood and our current position inside the regime.
The December producer-price index reading on Tuesday was milder than anticipated, providing traders and investors with some respite from the run of high inflation data from the previous few months of the year. Reynolds of Glenmede, however, stated that producer prices represent “a pipeline of where CPI may be going, rather than where it has been,” and that they provide information about next months, thus it was insufficient to change his opinion of Wednesday’s inflation figure.
As traders and investors evaluated the effect of the December PPI report, U.S. markets, including the DJIA SPX COMP, ended Tuesday largely higher. The 30-year yield, BX:TMUBMUSD30Y, was close to its highest closing level since October 31, 2023, after briefly breaking above 5%. According to FactSet data, 5- and 10-year breakeven rates—which represent market-based projections of future inflation—rose to about 2.6% and 2.5%, respectively, further deviating from the Fed’s 2% target.
Concerning inflation expectations, there are a few more concerning indicators. According to a New York Fed consumer poll conducted in December, median predictions for inflation over the next three years rose from 2.6% to 3%. Additionally, consumer estimates for inflation over the next year increased to 3.3% in January, according to statistics from the University of Michigan.
In addition, inflation speculators are now anticipating that the headline CPI rate for December and January will be 2.9%. They predict that during May, the rate will veer toward 2.5% before rising to 2.8% in August and September.
“The market psychology will be that things will only get worse,” stated Gang Hu, a trader with the New York hedge fund WinShore Capital Partners, if Wednesday’s CPI data is more volatile than anticipated. However, he stated that “that doesn’t mean much” if the data is at or below expectations. According to market participants, this data is being seen “with an asymmetric view, meaning that if the numbers are low, they can write it off, but if they are high, it will only get worse.”
