Today is the last U.S. inflation data release of the year. This is even more important than tomorrow’s Fed meeting. No sensations are expected from it: the regulator will almost certainly raise the rate by 0.5%. But what will happen next will be determined by today’s data.
Many investors are off to a “low start” and are ready to buy at the slightest drop of positive news.
Going up? If the decline in inflation is strong, the S&P 500 will simply skyrocket, to as much as 8-10%. At least that’s what they say at JP Morgan. But for that to happen, the CPI would have to plummet from the current 7.7% to 6.9% right away. There is only a 5% chance of that happening.
Maybe at least some growth? JPM is still waiting more for today’s inflation data of 7.2-7.4%. That would still be a slowdown in price growth, so the markets could very well gain 2%-3%.
And inflation does have reason to slow down. The price of services (not including housing) in the U.S. has been rising more slowly. In October they added only 0.3% – noticeably lower than the 0.5% gain in September. Housing, too, is cooling down. But it’s still hard to turn around a mammoth like today’s U.S. inflation – the price slowdown will be gradual.
What’s the bottom line? A 10% rise in the S&P 500, of course, is unlikely. The problems aren’t going anywhere, the labor market is still strong. But a slight slowdown in inflation and a moderately positive market – why not?
By the way, from the beginning of 2023, annual inflation will slow down – at least because of the base effect. After all, the new prices will be compared to last year’s prices – already high. But that’s no reason to kid yourself: you have to look at the slowdown in price growth month by month.