Dec 12, 2022 - Economy

It’s a big week for markets with CPI and Fed on tap

Illustration of an abstract collage of arrows, concentric circles, grids and US currency.

Illustration: Shoshana Gordon/Axios

Sturm and Drang. Yin and Yang. Inflation and the Fed. The twin forces that dominated markets this year are about to have a big week.

  • What's happening: Consumer Price Index data is out Tuesday at 8:30am ET, and the Fed’s final rate decision of the year hits Wednesday afternoon.

Why it matters: Both events have the possibility to generate big market moves, which could make this horrible year look significantly better, or worse, going into the final stretch of trading in 2022.

The big picture: Look at your 401(k) statement! Or maybe don't! Uncomfortably high inflation and the Fed's effort to wrest it under control with sharp interest rate hikes clobbered the markets this year.

  • Even after a recent rebound the S&P 500 is down roughly 17%, on pace for its worst year since 2008.
  • The U.S. bond market — as measured by the Bloomberg U.S. aggregate index — is having its worst year on record stretching back to 1977, falling more than 13%.

State of play: The November CPI report is expected to show that the pace of price increases slowed, with the annual rate of inflation falling to 7.3%, from 7.7% in October, per estimates published by FactSet.

  • A lower-than-expected October CPI print kicked off a massive reaction: The S&P 500 climbed 5.5% on Nov. 10 in its best one-day gain since 2020.
  • Meanwhile, Fed watchers think the central bank will only raise by half a percentage point on Wednesday — marking a slowdown after four straight increases of three-quarters of a point.

Between the lines: With markets fairly certain that the slowdown in rate hikes will begin, investors will be looking for any indication that plans to pause hikes altogether could be coming into view.

  • On this point, economists will be watching the Fed's official statement to see whether it continues to include the phrase "ongoing increases in the target range will be appropriate" — and if it doesn't, that suggests that we might be nearing the end of the rate-hiking cycle.
  • That could generate a big relief rally in both stocks and bonds.

The bottom line: With less than a month left in an awful 2022, the fate of the markets remains all about the Fed and inflation.

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