Valentine’s Day Inflation Report
The next report on inflation is set for Feb. 14, with most forecasts indicating that the pace of inflation is still well above the U.S. Federal Reserve’s target of 2%
Active market participants are well aware that inflation is one of the most influential forces in the financial markets at this time.
Over the last several months, some of the stock market’s highest-magnitude one-day moves have been triggered by inflation-related news.
Back in September, the Dow Jones Industrial Average dropped by roughly 1,200 points in the wake of the August inflation report, which came in hotter than expected.
Then, on Nov. 13, the Dow Jones experienced another jaw-dropping move—this time in the opposite direction—when it rallied by roughly 3.7% in response to an October report that suggested inflation was finally cooling.
The last two inflation reports—in December and January—were far less impactful. But the forthcoming inflation report on Feb. 14 may be setting up to be a major market event.
On Feb. 14, the government will release the January inflation numbers at 8:30 a.m. EST.
This particular report is critical for a couple of reasons. Most importantly, the upcoming inflation report will serve as an additional data point for leaders at the Federal Reserve, as they assess the overall economic climate in the country.
If the forthcoming report doesn’t provide concrete evidence of a further contraction in inflation, it’s highly likely the Fed will move aggressively to raise interest rates once again at their next meeting (March 15-16).
The American stock market entered a bear market last year as rising interest rates negatively impacted near-term forecasts for the U.S. economy.
Right now, the stock market appears to be waiting for a cue that the Fed is done raising rates. A so-called “Fed pivot” that many expect could trigger another leg-up in the stock market.
However, the stock market is already up significantly in 2023, with the Nasdaq 100 and S&P 500 up 50% and 8%, respectively, so far this year.
Unfortunately, bullish optimism in the markets could get snuffed out quickly if the upcoming inflation report doesn’t provide further evidence that inflation is still cooling. As of right now, forecasts for the report aren’t that rosy.
The Federal Reserve Bank of Cleveland maintains a “nowcast” for ongoing inflation that indicates core inflation increased slightly in January 2023, as compared with December 2022.
Core inflation, which excludes food and energy costs, has remained stubbornly high for many months. According to last month’s inflation report, core inflation in the U.S. was hovering around 5.5%, which is down from the September peak of 6.7%, but still well ahead of the Fed’s 2% target.
If the upcoming report indicates that care inflation is still at 5.5%—or god forbid, back at 6% or above—it’s almost certain the Fed will move aggressively to raise rates at its March meeting.
The inflation situation is especially tenuous at this time because of the shockingly positive employment report that was released on Feb. 4. That report revealed that the U.S. economy added 500,000+ new jobs in January, which was more than double the expectation.
While certainly a strong positive for the economy, that report wasn’t necessarily well received on Wall Street. A strong job market theoretically puts the Fed on stronger footing to raise rates in March, especially if the Feb. 14 inflation report is a bust.
In the wake of that employment report, some market participants moved quickly to adjust their expectations for benchmark rates during 2023. For example, on Feb. 8, Bloomberg reported that the market experienced an influx of wagers that benchmark rates in the U.S. would climb to 6% at some point this year.
That’s a bit higher than the previous consensus in the market, which was closer to 5.25%.
Taken altogether, the above suggests that the Feb. 14 inflation report could provide a strong spark for either the bulls or the bears. If the inflation report is a bust, and inflation is beating back up, that will likely trigger a selloff in the markets.
On the other hand, a surprise cooling in the January inflation figures would have an opposite but equal effect—potentially triggering a big rally in the stock market. The third possible outcome is that the upcoming inflation report is a non-event, much like in December and January.
However, considering the most recent jobs report, and the market’s fast start to the year, it seems more likely that Feb. 14 will be a big day in the markets, one way or the other.
For more background on the monthly inflation report, check out this installment of Options Jive. To follow everything moving the markets—including the latest inflation figures—monitor tastylive, weekdays from 7 a.m. to 4 p.m. CDT.
Sage Anderson is a pseudonym. He’s an experienced trader of equity derivatives and has managed volatility-based portfolios as a former prop trading firm employee. He’s not an employee of Luckbox, tastylive or any affiliated companies. Readers can direct questions about this blog or other trading-related subjects, to firstname.lastname@example.org.