US and European futures are trading higher on the final trading day of the week as investors digest the US CPI data and the aftereffects of it. Traders are also eagerly awaiting the earnings seasons, which banks will kick start today. Two things are going to matter from here onwards. Firstly, the Fed’s stance towards its monetary policy is on the back of the latest US CPI reading. Secondly, the strength of the US earnings and their future forecast as a recession remains the single biggest concern among traders and investors. This is because, pretty much every single day, we are hearing about more and more companies reducing their headcounts, and these headcounts are going to matter as the US Jobs number is bound to tick higher. For now, the US jobs data continue to show that the US economy is more than likely to head towards a soft landing and the prospects of a hard landing are still very remote.
US Stock Market
Investors have been buying beaten-down growth firms, which has led to the Nasdaq Composite Index rising 4.1% so far this week. Since July, the index that is heavily weighted toward technology has not had a rally of that duration. This would be the largest weekly rise of the three indices. Both the S&P 500 and the Dow are on track for gains this week, with around 2.3% and 1.7% respectively, for the S&P 500.
The Nasdaq Composite ended the day up 0.64 percent at 11,001.10, bringing its gain to a total of five consecutive trading days. The closing value of the Dow Jones Industrial Average was 34,189.97, an increase of 216.96 points (or 0.64%). The final value of the S&P 500 was 3,983.17, representing an increase of 0.34%.
What Does The CPI Data Tells US?
The yearly growth in Consumer Price Index data for the United States remains significantly over the objective of 2% set by the Federal Reserve, although it has been steadily sliding down.
In keeping with the market’s expectation, the US consumer prices (as measured by a wide basket of goods and services) decreased by 0.1% in the last month, as per the data released yesterday. This equals to the highest month-over-month reduction since April 2020, when a huge portion of the nation was placed under lockdown in an effort to battle Covid.
Despite the decrease, the headline consumer price index (CPI) grew 6.5% from the previous year, illustrating the ongoing strain that the growing cost of living has had on people in the United States. Having said that, there was the yearly rise that was the lowest since October of 2021.
The so-called core consumer price index increased by 0.3% when it was adjusted to exclude the effects of fluctuating prices for food and energy. The core was up 5.7% from the previous year, which is consistent with what was expected.
The majority of the decrease in monthly prices may be attributed to a significant reduction in the price of gasoline. After climbing over $5 per gallon in the middle of 2022, prices at the pump have fallen by 9.4% this month and are presently 1.5% lower than they were one year ago.
The cost of fuel oil dropped by 16.6% over the course of the month, adding to the overall 4.5% drop in the energy index.
In December, the cost of food witnessed a small rise of 0.3%, but the cost of housing had a significant increase of 0.8% for the month and is currently 7.5% higher than it was a year ago. About a third of the Consumer Price Index is determined by the cost of housing.
The Fed and CPI
The decision-makers in charge of monetary policy are debating how many more interest rate increases they will need to implement in order to rein in the economy and bring inflation under control. The Federal Reserve has increased the benchmark interest rate on loans by 4.25 percentage points, bringing it to its highest level in the last 15 years. Officials have stated that the rate is likely to be higher than 5% before they are able to take a step back and evaluate the effect of the policy tightening.
After the release of the CPI data, market pricing indicated that there was a greater likelihood that the Fed could approve an increase in the interest rate by 0.25 percentage points on February the 1st. This would be another step down for the central bank, which had previously authorised four successive increases of 0.75 percentage points in the previous year before slowing down to a 0.5-point rise in December.
On Friday, major Wall Street banks such as JPMorgan Chase, Wells Fargo, Citigroup, and Bank of America will release their quarterly earnings reports. This will officially mark the beginning of the US earnings season. Investors and traders have been waiting for this moment and they are going to keep a close eye on the announcements made by these banks. This is because the earnings reports from the banks, together with their forecast, should help explain how companies and consumers are doing in the midst of an intensifying tug-of-war among experts over the likelihood of a recession and the severity of a recession. The earnings season is going to set the stage for the beginning of a volatile period for the US stock market.
In addition to the bank’s earnings, Delta Air Lines, BlackRock, and UnitedHealth are planning to release their quarterly earnings on Friday as well.