Market participants will be focused intently on the December Consumer Price Index report here on Wednesday morning. It is anticipated that CPI will top 7% on an annual basis for the first time since 1982, which would be the third straight month in which inflation exceeded 6%. Core inflation, which excludes food and energy, is expected to come in at around 5.4%.
The fact that inflation is running very hot is no secret. The Fed made it very clear it is concerned and is ready to do combat with inflation by raising interest rates and liquidating assets on its balance sheet. On Tuesday, Fed Chairman Jerome Powell was a bit more dovish, which helped the market to bounce, but this is a major shift for the economy and the market, and the issue is one that will not go away quickly or easily.
The big question the market faces today is whether the CPI report will trigger more rotational action. So far in 2022, the market movement has been largely a function of large computer programs that big funds use to reallocate their assets.
Growth stocks and names that are valued based on longer-term earnings suffer the most when inflation is a problem because they are discounted to present value at a higher rate. Money tends to move into value stocks, financials and commodities that tend to do better when prices and interest rates are rising.
This rotational action can be very abrupt when computer programs are used to implement it. The movement last week out of growth and into value that was triggered by the Fed minutes was close to a record, and the risk of more of this type of action is not remote.
The good news is that a hot CPI number is already anticipated to a great degree, so it won't come as a surprise. The bad news is that it may just be confirmation of a problem that is still building and is not yet fully discounted by the market.
We will see how things react, but this is a market that has some significant technical issues and is also faced with the potential for further rotational action as big money seeks to adjust to an inflationary environment.