Stocks Rise Monday Ahead of Fed Rate Decision, CPI Report

Stocks rose Monday ahead of an eventful week. Earnings are very light this week, so investors will primarily be focusing on macro-movers, with the main event being the Fed rate decision on Wednesday. Fed aside, investors will be monitoring the CPI report on Tuesday and the retail sales report Thursday.

Federal Reserve

The Fed is expected to raise rates by 50 basis points on Wednesday, which would be a pivot away from the 75 basis point hikes we have become accustomed to.

At the time of writing, investors are pricing in a 74.7% chance of a smaller thant 75 basis-point rate hike. While the slower pace would certainly be a boost to stocks, its become less of a dovish indicator in recent weeks.

In Fed Chair Jerome Powell’s recent speech, he said it “makes sense” to begin moderating rates, and stocks rallied on that sentence.

However, Powell went on to say, “Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.”

Ultimately, Powell separated pace from the terminal rate. Last time around we were expecting a 75 basis point hike and listened for hints on when a pivot would be possible, under the assumption that a quicker pivot meant a lower terminal rate.

Now, we aren’t in much different of a spot as we will assume a 50 basis point hike and shift the trading reactions to being based on comments that suggest the Fed is or isn’t seeing what it needs in the economy to not need to take on a higher-for-longer approach. That might be more difficult to read as the Fed isn’t going to put out a detailed list of data points that need to be met to trigger a scaled-back terminal rate, so our indicators became less material since it isn’t as simple as smaller means better.

Going into Wednesday and during the immediate trading days after, expect volatility and a game of tug-of-war as markets digest opaque comments and peruse subsequent data points that conflict with or support emerging Fed narratives.

CPI

The Consumer Price index precedes the Fed rate decision with a Tuesday-morning release.

Headline consumer prices for November are expected to have risen by 0.3%, matching October’s pace. Meanwhile, core consumer prices are expected to also rise by 0.3%, which would be a slight cooling from October’s 0.4% rise.

This report follows on the heels of a PPI report last week that disappointed investors with higher-than-expected monthly increases and upward revisions.

Investors will be watching out for higher-than-expected figures, surprise increases to the year-over-year rate, and upward revisions.

Retail Sales

Lastly, retail sales will continue to be tracked by investors.

Retail sales have been supported by low levels of unemployment and resilient spending by consumers. While these trends are normally seen as good, investors have been searching for cracks in spending and the labor market as the Fed aims to constrict the economy to bring inflation down. Signs of a worsening economy are ironically seen as good signs, as they imply the Fed has less room to continue raising rates.

Retail sales are expected to fall 0.1% following October’s 1.3% jump. Meanwhile, sales excluding autos are expected to rise 0.2% in November after a 1.3% rise in October.