Premarket Equities: Investors Are Underestimating Inflation…Again

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Investors are holding their breath in anticipation of Thursday morning’s Consumer Price Index inflation report – arguably the most important economic data so far this year.

Much depends on the outcome – if inflation continues to fall, it could support a market rally, while higher-than-expected inflation could send stocks tumbling.

What is happening: After a stormy 2022, the Federal Reserve’s battle with inflation has become Wall Street’s top concern – with investors attaching significant significance to any economic data that might indicate what the Fed will do next.

But recent data has been muddy. December’s highly anticipated jobs report had something for everyone — slowing wage growth and falling unemployment. The Fed’s meeting minutes, released last week, also didn’t offer many conclusive answers.

That’s why this CPI report will grab attention and go a long way in shaping market expectations for the Federal Reserve’s first policy meeting of the year.

The Fed Funds Futures market still sees a high probability of a quarter percentage point rate hike on Feb. 1, but the results of the CPI report could change that.

What Wall Street expects: Inflation slowed more than expected in October and November, leaving investors optimistic that the downward trend will continue in December and beyond. But a key reading of inflation-linked trade data suggests they expect inflation to fall faster than economists and Fed officials make.

According to economists polled by Refinitiv, consumer prices in December rose 6.5% on an annual basis, compared to 7.1% in November. On a monthly basis, the CPI should show no change from November.

Yet inflation swaps, transactions in which an investor agrees to exchange fixed payments for floating payments tied to the rate of inflation, indicate that investors believe inflation will fall to 2.5% over the next few years. next seven months, even though the Fed’s own projections indicate that inflation will remain well above 3% through 2024.

The inflation swap market is considered to be one of the easiest ways to assess the development of inflation over the next 12 months. Current expectations of a sharp decline in the CPI indicate that investors believe the Fed will likely cut rates this year in response to falling inflation levels.

Take-out: Investors seem to keep forgetting a cardinal rule of the market: don’t fight the Fed.

“The expectation with this week’s consumer price index is for further easing of inflationary pressures. Any improvement less than broad-based improvement will rattle investors’ nerves and keep the Fed active,” said analyst Greg McBride. chief financial officer at Bankrate.

Bets that the Fed will soon back away from high interest rates, even if officials say they won’t, could mean more market volatility ahead.

US stocks can be volatile, but in Asia the markets are soaring.

Investors, buoyed by China’s pivot away from its economically painful zero-Covid policy and a relaxation of regulations on tech companies, are piling cash in the world’s second-largest economy.

The MSCI Asia Pacific index, which excludes Japanese companies, jumped 2.5% in Tuesday’s session to close the day at 535.69 points. That’s up 24.6% since its most recent low on Oct. 24, reports my colleague Anna Cooban.

A rebound in investor sentiment toward Chinese equities fueled the rally. The MSCI China index rose 2.4% on Tuesday to stand 50% above its Oct. 31 low. Hong Kong’s Hang Seng index jumped 38% over the same period.

The Nasdaq Golden Dragon China Index – which tracks Chinese companies listed in the United States – rose 0.72% on Monday, putting it 71.3% above its late October trading level.

Morgan Stanley analysts said in a note on Tuesday that the bank has raised its stock price targets for Chinese companies and “expects[s] China leads global stock market performance in 2023.”

Wells Fargo was once the number one player in the multi-trillion dollar US mortgage market. Now the scandal-ridden bank is taking a step back as it grapples with the impact of rising interest rates and regulatory issues.

The company announced on Tuesday that it would refocus its mortgage business on serving bank customers and minority buyers instead of acquiring new customers, reports my colleague Matt Egan.

The retirement will likely cause Wells Fargo to lay off at least some employees, although the bank has not announced any details. A spokesperson declined to comment on the potential layoffs.

“Mortgage is an important relationship product, and our goal is to continue to be the primary lender to Wells Fargo bank customers as well as minority buyers,” said Kleber Santos, head of consumer lending at Wells Fargo, in a press release.

The move comes as Wells Fargo continues to have issues with regulators. Last month, the Consumer Financial Protection Bureau ordered Wells Fargo to pay a record $1.7 billion fine for “widespread mismanagement” over several years that harmed 16 million customer accounts.

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