Inflation takes center stage here on Thursday morning as the highly anticipated Consumer Price Index report for October is released at 8.30 am ET. Economists are expecting some cooling to 8.1% from 8.3% last month.
The CPI report is extremely important because it is very likely to influence how much the Fed will raise interest rates at its next meeting in December. Fed fund futures currently show a near 50/50 split between a hike of 75 basis points and 50 basis points. Those odds are very likely to shift on the news today, and that is going to determine how the market moves.
Market players have been distracted this week by the election and the FTX blowup in the cryptocurrency sector. There has been a run on FTX, and the panic has driven Bitcoin and other cryptos to their lowest levels in the last two years. There is still a great amount of uncertainty, but there is some stabilization in the asset class this morning.
The election results are still unresolved, and there is a good likelihood that Senate control will not be determined until a runoff election in Georgia in December. The Republicans very likely have control of the House, and that will produce the gridlock the stock market prefers.
The market focus is now going to shift back to inflation, economic growth and the Fed. The Fed has indicated it is likely to slow hikes but hike even higher, but the first big issue is what it will do in December. Market players had hoped for a pause or pivot, but Fed Chairman Jerome Powell made it clear that even if the Fed moves to a one-half percentage point hike in December there is likely to be even more hikes down the road.
On a technical basis, the good news is that we do not have an optimistic run-up into the CPI report this time. The pattern all year has been disappointment as the market anticipated friendly data. This time we have a much better setup for a rally on good news and less downside on bad news.
On Wednesday, the underlying action in the market was particularly poor. Many high-growth and speculative names were crushed. A huge number of stocks were hit with losses of 5% or more. This was likely caused in part by the chaos in the cryptocurrency sector, but for contrarians, this may be the sort of washout that sets up a good rebound as we head into positive end-of-the-year seasonality. But first, we have to deal with CPI and Fed expectations.
