The stock market got a hint that inflation was cooling when the producer price index was released late last week. Wall Street got more good news on the inflation front early Tuesday with the release of the consumer price index. But a bullish open for the major stock indexes closed with a whimper ahead of Wednesday’s Federal Reserve announcement.
The Fed is widely expected to raise the federal funds rates by 50 basis points Wednesday to a range of 4.25% to 4.5%. Looking forward to the February meeting, the chances of a quarter-point hike increased to 53.3%, up from 35.1% Monday.
But the stock market flashed a clear message Wednesday: It’s still worried about a recession next year. Inflation is still way too high for the Fed, which is still dealing with an extremely tight labor market and low unemployment. The Fed wants to see some softness in the labor market to help it fight inflation.
The narrative has temporarily switched from the fear of hyperinflation to slow growth (recession), which gives you disinflation.
Pick your poison.
The Dow closed 600 points off the morning highs and SPX closed 80 points off the morning highs.
The algorithms were programmed as usual. CPI was about 0.2% lower so they lifted stocks and stocks squeezed. After the knee-jerk, stocks sold off.
Let’s see what Powell does tomorrow, but a 50 basis point increase seems to be in the bag.
Have a great night.