Despite the headlines on Wednesday about the highest CPI numbers in nearly 40 years, the market did a good job of digesting the news. Stocks were mixed with some continued pockets of weakness in the worst-performing groups such as biotechnology and growth, but the indexes were steady and breadth was close to even.
Thursday morning there will be another reading on inflation when the PPI report is released. This measures inflation on a wholesale and commodity level and will also be a multi-decade high. The market knows this is coming, but there is always the danger that the headline could generate a response regardless.
In addition, weekly unemployment numbers will be released and are expected to be around a muted 200,000. The biggest problem that many businesses are facing now is absenteeism caused by the Omicron variant. The labor market is in disarray, and that will not be normalized until Omicron has peaked and starts to decline.
So far, there has been relatively little talk about the economic impact of Omicron as the focus has been on interest rates and the vicious rotational action that a more hawkish Fed has created. As earnings reports start to hit in the next few weeks, we will hear more about how Omicron is impacting individual businesses.
On Friday, banks will kick off fourth-quarter earnings season, with reports from Citibank (C) , Wells Fargo (WFC) , and JPMorgan Chase (JPM) . The following week there will be dozens of reports, mostly from bigger-cap names.
Despite the rather flat action on Wednesday, the market mood is dour, and there is a high level of concern that the inflation worries are going to trigger another round of selling. The shift in the Fed to a hawkish bias is not insignificant, and it makes sense that it is going to take longer than a week or two for the market to adjust.
Many market players are fearful of more rotational action, and they are not in a big rush to put capital to work. To add to the difficulty, there continues to be a huge gulf in performance between the stocks and sectors that topped back in February and the big-caps and index that just topped out in the last few weeks. It is going to take a while before that gulf in performance begins to close to a significant degree.
We have a quiet open as we await economic news.
