On Inflation Watch

By Jeffrey Cane |  Wednesday, February 9 Tomorrow Never Knows. Today was a good day for stocks, but it could be quickly forgotten. Tomorrow morning, all eyes in the U.S. market will be focused on terminal, TV, and phone screens for the headlines on January consumer prices. The number will be big, almost certainly the biggest since 1982.  If the annual advance in the consumer price index comes in above the consensus --7.2%, according to Bloomberg; 7.3%, says FactSet -- then expectations will quickly mount that the Federal Reserve will  need to raise rates by a half point, rather than the anticipated quarter point, at its next meeting, in March. (The core CPI, which excludes food and energy costs, is expected to come in at an 5.9% annual pace.) A fire-alarm hot inflation number would likely again whipsaw the market, which has only recently calmed down over the emergence of a newly hawkish Fed. Today, the CME FedWatch tool was pricing in a 25% chance of a rate bump of 50 basis points in March, a slight pullback from yesterday, when it was 29%. “Because the Fed hasn’t taken [a half-point boost] off the table, or said it’s extremely unlikely, the market is going to run with it,” said Aneta Markowska, chief financial economist at Jefferies, according to Bloomberg. “The Fed’s reaction function relies on one variable and that is inflation. These numbers are going to matter, big time.” Jack Ablin, chief investment officer at Cresset Capital Management, wrote: "Investors should buckle their seatbelts in preparation for some near-term inflation turbulence." A reading showing much milder inflation could also confound investors, forcing them to again reset their expectations. To be sure, that seems unlikely. The range of estimates for year-over-year CPI runs from 7.0% to 7.4%, according to Bloomberg.  Given the potential for turmoil, markets were remarkably sanguine today. Optimism about the re-reopening of the U.S. economy trumped other worries for a second day. A recent selloff in government debt worldwide continued to ease, and yields steadied. The yield on the benchmark 10-year U.S. Treasury note slipped to 1.928%.  Technology -- normally among the most sensitive sectors to rising interest rates -- led stocks higher. The tech-heavy Nasdaq Composite and Nasdaq 100 indexes both closed up 2.1%.  All 11 sectors of the S&P 500 ended in positive territory -- four of them with gains of more than 2%. The index itself closed up 1.5%. The Dow Jones Industrial Average climbed 0.9%, and the Russell 2000 surged 1.9%. Elsewhere, crude oil futures rose 0.3%, to $89.66 a barrel. Even an inflation surprise tomorrow could prove to be a damp squib, as the British like to say. Investors may decide to look past an ugly number or two and focus on the economy's return to normalcy, or at least something close to it. Strong quarterly earnings and revenue numbers from Walt Disney this evening supports that bullish lens. Disney's stock was up 7% in after-hours trading. My Review & Preview colleague Nicholas Jasinski has more on the results here.  James Paulsen, the Leuthold Group’s chief investment strategist, is also of the view that blazing hot consumer inflation numbers may not cause investors to panic.  "Our best guess," he wrote, "is that most investors fully expect a couple more ugly inflation numbers, and, consequently, we think those presumed results are already being discounted by the stock market."

 

DJIA: +0.86% to 35,768.06 S&P 500: +1.45% to 4,587.18 Nasdaq: +2.08% to 14,490.37 The Hot Stock: Omnicom Group +14.2% The Biggest Loser: CVS Health -5.5% Best Sector: Communication Services +2.8% Worst Sector: Consumer Staples +0.03%