The Courage of Bulls
Macro Perspectives
We head into today’s (potentially huge) inflation report, with stocks closing on the 200-day moving average (purple line) and trading just below the downward trendline (orange line) that represents the bear market of 2022.
A weak inflation number, would be a clear catalyst for a bullish technical break out in stocks. Let's take a look at the CPI index...
In the chart above, inflation over the past six months on this headline index has levelled off. The rate-of-change in prices, inflation, has clearly been curtailed - that's good!
Even if today is a seventh consecutive month of mild monthly inflation, when measured against the low base of twelve months ago, it's still a big number (and will be for months ahead). In fact, if the November to December change in prices within this index were zero, the year-over-year inflation would still be 6.8%. This is the "base effect" that the Fed once used, back in 2021, to dismiss inflation as "transitory."
Bottom line, what matters is the monthly change in prices. With that, let's look at some inputs into CPI that we know;
Gas prices: The Energy Information Administration (EIA) does a weekly survey of gas stations across the country. Those survey results show a decline in gas prices by about 8% in December (and down 35% since June). Transportation carries almost a 1/5th weighting in the CPI calculation.
Used Cars: The Manheim used car price index was UP less than 1% in December. That breaks a sixth month of consecutive price declines. Overall used car prices were down 15% from the beginning of last year.
New Car prices: Cox Automotive says average new car prices were up 1.9% in December.
Rents: The Apartment List Rent Report showed a fourth consecutive monthly decline in rents, down 0.8%.
House prices: Redfin.com says the median house price was up 1.3% from November to December. That's down 8% from the June peak.
Mortgage rates: Mortgage rates finished December about 17 basis points higher than the month prior.
ISM: ISM services report, released earlier this week, services prices were down in December.
Food: This has been a hot area of the inflation report this year, finally showing some signs of cooling in November. As a proxy, the FAO Food Price Index, which measures global food prices, fell in December for a ninth consecutive month.
So, the price data look mixed in December. But as we know, the government data tends to be stale. If we look back at the end of November data, from these same sources listed above, prices were broadly declining.
With all of this in mind, by no coincidence, the Fed has three officials (speakers) on the calendar before midday today. We should expect them to continue doing what they've been doing: combating optimism, with threats of higher rates at the economy and financial markets, in order to keep a lid on confidence.
As a reminder, with the 10-year yield at 3.55%, the bond market isn't in agreement with the Fed's narrative. That gives courage to stock investors.
