Stock Investors Brace for Possibly the Most Important Inflation Reading in Recent Memory
As investors gear up for Wednesday’s consumer-price index (CPI) report for December, uncertainty looms large over the stock and bond markets. This upcoming CPI data, which measures inflation, could have significant implications for investors who find themselves susceptible to surprises in either direction.
Anticipated Rise in Annual Headline CPI
The annual headline CPI inflation rate, which saw a steady decline from April to September 2024, is expected to edge back up for a third month in a row, with economists predicting it to rise to **2.9%** from **2.7%** in November. This projection, based on the median estimate from a survey conducted by the Wall Street Journal, suggests that the annual headline rate may approach **3%** for the first time since July. That period was critical because it preceded the Federal Reserve’s three rate cuts in 2024.
Potential Market Reactions
If the annual headline CPI rate exceeds **2.9%**, it could send shockwaves through financial markets. Chris Brigati, chief investment officer at Texas-based investment firm SWBC, remarked that the December CPI report “may be the most important inflation reading in recent memory.” He emphasizes that an unexpected rise in inflation could lead investors to reconsider their forecasts for Fed rate cuts in 2025, and potentially even consider a rate hike instead.
Meanwhile, Michael Reynolds, vice president of investment strategy at Glenmede, is particularly focused on the monthly core reading, especially “core services excluding shelter,” which often proves to be a stubborn component of inflation. He indicated that any rise to **0.5%** in monthly core CPI—beyond the economist median estimate of **0.3%**—could disturb both stock and bond markets.
Long-Term Implications
Reynolds cautioned that a sustained increase in inflation would lead investors to reassess the proper yield on Treasury securities, thus exerting upward pressure on those yields. Given the heightened sensitivity of equity markets to Treasury yields, a re-evaluation could shift valuation levels across the stock market. He noted that this recalibration might extend until market confidence stabilizes around an inflation benchmark near **2%**. Depending on the strength of the CPI inflation data, a **10-year yield of 5%** could emerge as a realistic figure.
Reactions from Financial Institutions
Some major investment firms have expressed concerns regarding inflation. For instance, Barclays has introduced the notion that the CPI could plateau around **3%** if the proposed tariffs from President-elect Donald Trump take effect. Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management, posited that inflation is likely to surge between **3.5%** and **4%** this year.
Additionally, strategists at TD Securities acknowledged that discussions surrounding the potential for rate hikes in the U.S. are gaining traction, even if they do not predict it as a significant likelihood.
Producer Prices and Market Sentiment
On a more encouraging note, a recent reading of the producer-price index (PPI) for December provided some temporary relief to investors, indicating a less-than-expected rise in prices. However, Reynolds emphasized that the PPI serves as an indicator of future CPI trends rather than a direct reflection of current inflation conditions. Moreover, the recent PPI data did not alter his expectations for the imminent CPI report.
Consumer Expectations and Future Outlook
Market players are also closely watching consumer expectations for inflation. A survey conducted by the New York Fed revealed that median expectations for inflation over the next three years have jumped to **3%** from **2.6%**. Moreover, data from the University of Michigan showed that consumer expectations for inflation over the upcoming year have risen to **3.3%** in January.
Inflation traders are bracing themselves for the annual headline CPI to register at **2.9%** for both December and January, expecting a gradual decline to **2.5%** by May, before edging back up to **2.8%** later in the year.
Asymmetric Market Psychology
The upcoming CPI report is expected to evoke an asymmetric view among market participants. Gang Hu, a trader at New York hedge fund WinShore Capital Partners, pointed out that if inflation numbers come in higher than expected, it may signal to the market that conditions will worsen, while lower numbers may not be perceived as sufficient reassurance.
As Wednesday’s critical CPI report approaches, all eyes will remain glued to the results, which promise to shape not only immediate market reactions but also long-term investor strategies in the unfolding economic landscape.