U.S. stock index futures posted modest gains Tuesday morning ahead of a highly anticipated consumer price index (CPI) report and Federal Reserve monetary policy announcement this week. Investors are parsing the vital economic data and central bank updates for clues on the future trajectory of inflation, growth, and interest rates.
The Dow Jones Industrial Average futures ticked up early Tuesday, signaling a positive open for blue-chip stocks. Broader market S&P 500 and tech-heavy Nasdaq 100 futures hovered near the breakeven line after both indexes logged their sixth straight weekly advance last week. The S&P 500 closed at its highest level since March 2022 on Monday, reflecting building optimism around the economic outlook for 2023.
Economists forecast the November CPI data, slated for release Tuesday morning, to show consumer prices remaining flat month-over-month. On a year-over-year basis, expectations sit at 3.1% growth compared to October’s 7.7% jump. The core CPI figure, which strips out volatile food and energy components, is also predicted to match estimates of a 0.3% monthly and 4% annual increase.
Several recent reports on producer prices, personal consumption expenditures, and average hourly earnings seem to confirm inflation is on a steadily decelerating trajectory, easing pressure on households and the Fed. However, some variation in monthly prints is likely in coming months. Moderation back towards the central bank’s 2% target still appears poised to materialize over 2023 without recession as supply chain stresses and labor imbalances continue improving.
The Federal Open Market Committee’s policy directive and latest Summary of Economic Projections on Wednesday offer critical insights on policymakers’ reaction function and views. While most economists expect a tempering of September’s hawkish tone, another 50 basis point rate hike likely emerges alongside relatively modest downward revisions to future median “dot plot” forecasts. Rhetoric emphasizing flexibility and data-dependence would reinforce expectations for a downshift to 25 basis point tightening at early 2023 meetings.
Market pricing points to interest rate cuts commencing around mid-2024 as inflationary pressures normalize further. According to the December CNBC Fed Survey, over half of respondents forecast cuts beginning next June. Further easing is seen as probable in July as well. This dovish pivot, largely justified under still-solid real economic activity assumptions, typically catalyzes stock and bond market gains by reducing discount rates and spurring flows out of cash.
Some Wall Street strategists, however, urge caution on baking-in policy adjustments too far in advance while uncertainty still lingers. Although recession risks appear contained headed into the new year, a relapse in supply-side or inflation dynamics cannot be fully discounted yet either. And front-loaded tightening could enable quicker normalization than during past cycles. Developments on the geopolitical stage also warrant ongoing monitoring as a potential curveball.
In any case, markets seem inclined to embrace the prevailing “Goldilocks” mindset for now. A scenario of slower but still-positive GDP growth and substantially reduced price pressures in 2023 without cratering into downturn would provide welcome relief. Business and consumer activity could find firmer footing again while enabling healthier risk-taking. This economic “soft landing” would particularly benefit rate-sensitive sectors like housing and technology which bore the brunt of recent market turmoil.
Bank of America strategists capture the relatively constructive attitude emanating from stocks bouncing over 20% off October lows. While more muted near-term returns may materialize as sentiment measures rebalance from oversold pessimism, assets seem poised for further upside as lower uncertainty unlocks additional flows out of elevated cash levels. JPMorgan also highlights substantial “under-investment” evidencing pent-up bullish appetite ready for deployment under improved visibility.
Corporate Earnings Still Center Stage Alongside Macro Developments
Despite theattention fixed on pivotal turns in monetary policy, the fundamental underpinnings of equity markets remain tied to corporate earnings. And aggregate S&P 500 profits surprised substantially to the upside again last quarter, spotlighting business resilience. Margins generally exceeded gloomy expectations as well, counter to typical late-cycle dynamics, even as management commentary adopted an appropriately measured tone.
Oracle slid over 7% in post-market trading Tuesday after posting lighter-than-expected quarterly revenues. Yet financial sector leaders like Goldman Sachs and JP Morgan Chase recently sounded optimistic notes around 2023 activity. Market bellwethers including Apple and Amazon have meanwhile guided conservatively, leaving room for positive surprises while navigating unfamiliar terrain.
If global demand trends stabilize and input costs avoid takeoff, current analyst forecasts for mid single-digit S&P 500 earnings growth next year could prove reasonable or conservative. Stocks trading around 17-18x forward projections would seem attractively valued against still-high fixed income yields under those outcomes. And substantially exceeding guarded profit assumptions could spur double-digit appreciation if valuations reflate further.
Of course, various factors from an extraordinary year of volatility and macro recalibration could resurface to derail the provisional fundamental and technical recovery narrative underpinning markets. But investors are again viewing the glass as half full after a period of pervasive negativity.
Ongoing Data Flow Crucial for Validating Assumptions
Upcoming economic data flow and guidance out of Europe and China will help shape views on plateauing price pressures and the resilience of domestic and global demand. Any major downside surprises or upside inflation breakouts would test the tentative sense of relief around peaking rates and normalization timeline horizons. But baseline-consistent releases could solidify perceptions of an activity trough and macro progress to reinforce the pivot towards discounting Fed easing.
While this week’s U.S. CPI, Fed meeting, and European Central Bank decision seem unlikely to disrupt or substantially accelerate market stabilization and budding optimism, they represent essential progress markers. And beyond forwarding-looking policy revisions, messaging that affirms disinflation trends or shows comfort with financial conditions will hold outsized influence as well.
For now, recession obsession appears overdone compared to underlying economic health still skewed towards continued expansion once absorbing rate shocks. The lagged impacts of front-loaded hikes alongside fading cost spikes bode well for extending the record 121-month growth period despite pockets of weakness.
Of course, downside risks ranging from global spillovers to housing cracks linger in an inherently uncertain environment. The probability of near-term turbulence also rises given stretched positioning and sentiment. But stocks seem poised to grind higher over the intermediate-term as broader end-demand holds up better than feared. And while another retest of bear market lows remains possible, the market gauntlet of the past year plants seeds for longer-horizon opportunity as peaks and panic subside.