Wall Street Traders Hold Their Breath Before CPI: Markets Wrap

On a day filled with uncertainty, Wall Street traders were on edge as they anticipated crucial inflation data, specifically the consumer price index (CPI), which could influence Federal Reserve policies. Stocks showed some fluctuations throughout the day, with investors cautious about making major moves ahead of this significant report.

The S&P 500 index ultimately ended 0.1% higher, with most of its components rising. However, major tech stocks once again faced challenges. Options traders were preparing for an active CPI day, with expectations of a potential movement of 1% in either direction for the US equity benchmark on January 15, as noted by Stuart Kaiser from Citigroup Inc.

Chris Brigati from SWBC highlighted the importance of the upcoming CPI report, calling it potentially the most significant inflation reading in a long time. A strong reading could reinforce the idea that there will be no interest rate cuts in 2025 and may even suggest a possible rate hike, whereas a weaker reading might ease concerns about the Fed's future actions.

Economic data released on Tuesday indicated that the producer price index (PPI) showed an unexpectedly slower pace in December, driven by lower food prices and stagnant service costs. However, components that inform the Fed's preferred inflation measure, the personal consumption expenditures (PCE) gauge, revealed mixed signals for December.

This mixed data means markets may be on shaky ground leading up to Wednesday’s CPI report, according to Krishna Guha at Evercore. The S&P 500 had briefly dipped below its 100-day moving average but closed above it by the end of trading. Meanwhile, the Nasdaq 100 saw a slight decline of 0.1%, and the Dow Jones Industrial Average gained 0.5%. The Russell 2000 index, which represents small firms, rose 1.1% as homebuilders experienced a surge after KB Home reported better-than-expected earnings.

The yield on 10-year Treasuries remained largely unchanged at 4.78%, while the dollar decreased following a report suggesting that Donald Trump’s incoming economic team might consider gradual tariff increases, aimed at controlling inflation.

Oil prices dropped from a five-month high as discussions between Hamas and Israel indicated a tentative cease-fire, which eased concerns over potential disruptions to Russian and Iranian oil supplies.

In the cryptocurrency market, Bitcoin faced challenges as the outlook on Fed policy affected crypto investments.

A forecast for inflation suggests only a slight cooling towards the end of 2024, indicating that a resilient job market could lead the Fed to adopt a cautious approach towards any rate cuts. Projections indicate that the core CPI, which excludes food and energy, is expected to rise by 0.2% in December, compared to steady increases of 0.3% over the past four months. Year-over-year, the core CPI is anticipated to be around 3.3%, mirroring the previous three-month figures.

A survey conducted by 22V Research indicated that nearly half of the investors expect the market response to the CPI report to be 'risk-off', whereas others anticipated a 'risk-on' approach. Many investors also expressed the belief that tightening financial conditions may be necessary for the US economy to achieve greater stability, balancing core PCE around 2% alongside full employment.

As Wall Street prepares for the unofficial earnings season, major banks like JPMorgan Chase & Co. and Wells Fargo & Co. are expected to report earnings on Wednesday. Analysts are particularly focused on net interest income, which has been under pressure due to higher deposits and subdued loan demand. According to Brigati, observing whether banks can benefit from lower borrowing rates will be a critical indicator for the upcoming year.

Corporate Updates

• Southwest Airlines has decided to pause hiring for management and other roles as part of new cost-cutting measures.

• Meta Platforms announced job cuts comprising about 5% of its workforce, while still planning to hire new talent later in the year.

• According to a Federal Trade Commission report, CVS Health, Cigna, and UnitedHealth charged significantly above the national acquisition average for specialty drugs, resulting in over $7.3 billion in excess revenues over six years.

• B. Riley Financial is under scrutiny from federal regulators regarding its operations with the bankrupt Franchise Group and a personal loan tied to its co-founder.

• Capital One Financial was accused of misleading their customers during the launch of a new savings account that didn’t benefit existing account holders.

• United Rentals has agreed to acquire H&E Equipment Services for $3.4 billion in cash.

• Country Garden Holdings reported another significant loss as it continues its restructuring efforts after defaulting on debt obligations.

Key Events This Week

• Eurozone industrial production data - Wednesday

• Earnings reports from Citigroup, JPMorgan, Goldman Sachs, Bank of New York Mellon, Wells Fargo, and BlackRock - Wednesday

• US CPI data and Empire manufacturing index - Wednesday

• Comments from Federal Reserve officials including John Williams, Tom Barkin, Austan Goolsbee, and Neel Kashkari - Wednesday

• TSMC earnings release - Thursday

• ECB publishes account of December policy meeting - Thursday

• Earnings reports from Bank of America and Morgan Stanley - Thursday

• US initial jobless claims, retail sales, and import prices - Thursday

• China GDP, property prices, retail sales, and industrial production - Friday

• Eurozone CPI data - Friday

• US housing starts and industrial production - Friday

The market trends were as follows:

Market Movements

• The S&P 500 rose by 0.1%

• The Nasdaq 100 fell by 0.1%

• The Dow Jones Industrial Average increased by 0.5%

• The MSCI World Index saw a 0.2% rise

• The Bloomberg Magnificent 7 Total Return Index declined by 1%

• The Russell 2000 Index experienced a 1.1% gain

Currency Movements

• The Bloomberg Dollar Spot Index fell by 0.4%

• The euro rose by 0.6% to $1.0302

• The British pound remained stable at $1.2206

• The Japanese yen depreciated by 0.3% to 157.97 per dollar

Cryptocurrency Updates

• Bitcoin appreciated by 2.5% reaching $96,500.95

• Ether rose by 3.3% to $3,217.58

Bond Insights

• The yield on 10-year Treasuries remained unchanged at 4.78%

• Germany’s 10-year yield increased by four basis points to 2.65%

• Britain’s 10-year yield stayed steady at 4.89%

Commodity Prices

• West Texas Intermediate crude slipped by 1.3% to $77.82 a barrel

• Spot gold rose 0.5% to $2,676.38 an ounce.

stocks, inflation, CPI, markets, earnings