CPI Report Drives Mixed Feelings on Valentine’s Day

Today is Valentine’s Day, but yesterday it looked like the stock market was celebrating Valentine’s Day because there was a lot of love for stocks. Market participants didn’t act worried at all about the January Consumer Price Index and what it might show in terms of inflation trends and what it might convey in terms of the Fed’s thinking about monetary policy.

Remarkably, the S&P 500 made up everything it lost last week and a smidgen more, demonstrating once again a willingness to buy on weakness.

The mega-cap stocks drove the rebound effort but it was a family affair. The major indices all gained at least 1.1%. Buyers came back for more this morning, too, driving the futures for the major indices higher ahead of the January CPI report at 8:30 a.m. ET.

Currently, the S&P 500 futures are up six points and are trading 0.1% above fair value, the Nasdaq 100 futures are up three and are trading roughly in-line with fair value, and the Dow Jones Industrial Average futures are up 56 points and are trading 0.2% above fair value.

There has been some whipsaw trading action following the CPI report. The futures spiked higher initially, but rapidly reversed, erasing those gains and then some before rebounding again. There was some whipsaw volatility in the Treasury market, too. The 2-yr note yield spiked to 4.57%, came back to 4.48%, and is currently at 4.53%. The 10-yr note yield bumped up to 3.72%, fell to 3.64%, and is currently at 3.69%.

Total CPI increased 0.5% month-over-month (Briefing.com consensus 0.5%) following last month’s upwardly revised 0.1% increase (from -0.1%) and core-CPI, which excludes food and energy, increased 0.4% month-over-month (Briefing.com consensus 0.4%) on top of last month’s upwardly revised 0.4% increase (from 0.3%). The index for shelter accounted for nearly half of the monthly all items increase.

On a year-over-year basis, total CPI was up 6.4% — the smallest 12-month increase since the period ending October 2021 — and core-CPI was up 5.6% — the smallest 12-month increase since December 2021. Still, the year-over-year levels were not as low as expected.

The key takeaway from the report is that there has been a clear deceleration from peak inflation; however, the inflation rates are not nearly low enough to suggest the Fed would even be thinking about cutting rates this year.

This inflation report is drowning out most other news items like Dow component Coca-Cola (KO) reporting in-line earnings and issuing better than expected FY23 guidance, Bloomberg reporting that President Biden will name Fed Vice Chair Lael Brainard to be Director of the National Economic Council later this week, thereby creating an opening at the Fed, and the eurozone reporting in-line Q4 GDP growth of 0.1% quarter-over-quarter.

How the stock market settles today is anyone’s guess. The volatility following the CPI report suggests it can be cherry-picked for interpretation by bulls and bears alike.

Today’s price action, then, will ultimately be the tell, but perhaps more so in the Treasury market than the stock market.

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Originally Posted February 14, 2023 – CPI report drives mixed feelings on Valentine’s Day