After early worries on Tuesday about the potential for hawkish comments from Fed Chairman Jerome Powell, the market turned up and produced positive action. Powell did not make any significant comments about short-term monetary policy, which allowed buyers to focus instead on the Consumer Price Index report that is due out on Thursday morning.
CPI is expected to cool to 6.6% for December, which is still elevated but would confirm a downtrend after a 7.1% report in November. There is optimism that the numbers may even be softer than anticipated, but a hot report will catch many market players by surprise and produce an ugly response.
J.P. Morgan predicts there is a 65% chance the CPI will be in the range of 6.4% to 6.6%, and if that is the case there will be a positive response that creates a "sell the news" setup. That will depend to a great degree on what happens on Wednesday, but the run-up into CPI likely will cause some interest among the bears.
The bearish argument at this point is that the market already has discounted cooling CPI. There are two other economic issues the Fed must contend with, the first being strong employment and wage-related inflation and the other a quickly slowing economy. The coming earnings season will provide many clues about where the economy is headed.
Several big banks will kick off earnings season on Friday morning, providing the first clues as to market sentiment for earnings. The consensus view is that estimates in general are too high, but the question for traders is to what degree some earnings misses and poor guidance are already discounted.
The action on Wednesday will be about positioning. There should be hedging action, but expect another choppy session as we wait.
