Stocks Closed Higher Yesterday After Reversing Early Losses, PPI Inflation Report On Deck This Morning
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Stocks closed mostly higher yesterday with only the Nasdaq eking out a small loss.
The markets opened lower and quickly put in their worst levels of the day. Then they slowly began climbing back up and turning positive by the close.
Last Friday's better-than-expected Employment Situation Report sent stocks sharply lower on concerns the economy was heating up (not a bad thing), which in turn could cause inflation to go up, or at least continue to stall or not go down, and thus delaying the next rate cut even further.
While the likelihood of the Fed NOT cutting rates this month (January 29) is almost a forgone conclusion at 97.3% odds, what happens at their subsequent meeting on March 31 (they don't meet in February) is still up in the air.
But as I mentioned yesterday, the overemphasis on rate cuts, I believe, is getting misplaced. The economy is clearly doing just fine with rates at the current levels. Let's also not forget that the Fed already cut rates by 100 basis points last year (all within 4 short months). And they fully anticipate to cut by another 50 basis points this year. Additionally, inflation has fallen considerably over the last couple of years. And even though progress has stalled recently, it's clearly not hampering economic growth.
The market and the Fed will get another look at inflation this week with the Produce Price Index (PPI) this morning. Headline wholesale inflation is expected to be up 0.3% m/m, a bit under last month's pace of 0.4%, while the y/y rate is expected to be up 3.3% vs. last month's 3.0%. The core rate (ex-food & energy) is expected to be up 0.2% m/m, in line with last month's pace, while the y/y rate is expected to come in at 3.4%, also the same as last month.
Tomorrow we'll the Consumer Price Index (CPI), which is retail inflation. The expectations are largely the same with headline m/m changes in line with last month's 0.3%, while y/y changes are expected to be up a bit (2.9% vs. 2.7%). The core m/m change is expected to come in slightly lower than last month at 0.2% vs. 0.3%, while the y/y rate is expected to match last month's 3.3% pace.
Highly unlikely today's PPI or tomorrow's CPI alters the Fed's plans on 1/29. But it definitely could impact what the Fed says at the meeting, and what their forecast might be for March.
In addition to today's PPI report, we'll also get the NFIB Small Business Optimism Index.
And we'll hear from Fed policymakers Jeffrey Schmid and John Williams as they speak at their respective engagements.
Earnings season officially begins next week on Wednesday, 1/22, when Alcoa reports earnings after the close.
But earnings season unofficially has already begun, and will pick up steam as the week progresses with plenty of big banks on deck including BlackRock, Wells Fargo, JPMorgan Chase and Citigroup on Wednesday; Bank of America, Morgan Stanley, PNC Financial and U.S. Bancorp on Thursday; and State Street, Huntington Bancshares and Regions Financial on Friday.
The market will also begin digesting the outgoing Administration's 'final rule' regarding export controls on AI chips. When it was released yesterday, plenty of industry leaders took issue with it, including NVIDIA. While it doesn't take effect for 120 days, the incoming Administration is likely to review it or make changes. One of the biggest complaints was that industry leaders did not feel like they were consulted or able to provide input. But they will likely get that opportunity over the next 4 months. So the 'final rule' could very well look much different than what it looks like now.
In the meantime, the market will try and build on yesterday's bullish intraday reversal.
See you tomorrow,
Kevin Matras
Executive Vice President, Zacks Investment Research
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