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Market Extra: What stock-market investors will be watching in Thursday’s U.S. inflation report


Hotter-than-expected U.S. consumer-price index readings have triggered some of the stock market’s biggest one-day selloffs in 2022, serving to focus investor attention ahead of the latest measure of retail inflation on Thursday.

The September CPI reading from the Bureau of Labor Statistics, which tracks changes in the prices paid by consumers for goods and services, is expected to show an 8.1% rise from a year earlier, slowing from an 8.3% year-over-year rise seen in August, according to a survey of economists by Dow Jones. 

The S&P 500

is down 24.6% year to date through Wednesday, according to Dow Jones Market Data. Most of the single days that are responsible for the decline occurred on or around CPI reports or Fed-related events, said Nicholas Colas,co-founder of DataTrek Research, in a note on Monday. Two of the S&P 500’s nine largest down days this year have come on days when CPI data was released, he noted.

Without those nine down days, the S&P 500 would have been up 8.6% year-to-date through the end of last week, Colas wrote.

For example, the S&P 500 recorded its biggest daily percentage fall since June 2020 last month on CPI reporting day, when the large-cap index shed 177.7 points, or 4.3%. On June 13, the S&P slid 3.9% and ended in a bear market after the May inflation report came in hotter than expected, with CPI hitting a 40-year high. Three days later, the index dropped 3.3% following what was then the Federal Reserve’s largest rate hike since 1994. 

“Every time we see large selloffs it means investor confidence has collided with macro uncertainty,” warned Colas. “History shows that valuations suffer when this happens repeatedly. As we see further equity market volatility, keep your expectations for valuations modest. They will bottom when macro news is greeted with a rally that sticks, not one that fades away a few days later.” 

See: It’s time to pivot from the idea of a Federal Reserve rate-hike pivot, Goldman Sachs strategists say

Bloomberg reported that JPMorgan’s analysts led by Andrew Tyler expect the stock market to tumble by 5% on Thursday if the inflation gauge comes in above August’s 8.3%. If the result is in line with the consensus, the S&P 500 index would fall about 2%. On the flip side, the team forecast any softening inflation below 7.9% will spark an equity rally where the index may jump at least 2%. 

However, Aoifinn Devitt, chief investment officer at Moneta, said the market would take the top-line number and react to it. 

“I would expect to see a similar reaction to what we saw from Friday’s jobs report, which was a positive number that translates into a negative stock-market reaction,” Devitt told MarketWatch via phone. “Stock prices have adjusted. Earnings have adjusted, so there’s already been this kind of managing of expectations (which) leads me to take up some of this and try to be on the upside for some of these stocks, just because so much of the bad news is already there.” 

See: Stocks could fall ‘another easy 20%’ and next drop will be ‘much more painful than the first’, Jamie Dimon says

The September inflation report is expected to show the headline CPI continued moderating as gasoline and commodity prices fell to the February level. But future expectations may have changed after OPEC+ announced last week its decision to cut production by 2 million barrels a day, which may have “lagging effect (on inflation data)“, according to Devitt. 

See: Wholesale prices rise for first time in three months and show U.S. inflation still raging

Meanwhile, shelter costs and medical care services, which have been at the core of inflationary pressures and are sticky, are expected to increase by 0.7% on a monthly basis. The core CPI is expected to be running at a year-over-year pace of 6.5%, up from 6.3% in August. 

“The bulls are desperate for signs that inflation is set to roll back to the Fed’s target — they may be mistaken, and while headline inflation is expected to fall thanks to a decline in energy, the Fed’s focus has shifted towards core CPI,” said Chris Weston, head of research of Pepperstone, in a Tuesday note.

“This is why core CPI will unlikely roll over anytime soon and why the Fed has made it clear they will hike further and leave the fed fund rate in restrictive territory for an extended period,” he wrote.

The producer-price index, which measures the prices that U.S. businesses charge for the goods and services they produce, increased 0.4% for the month, the government said Wednesday. On a 12-month basis, the PPI increased at an annual rate of 8.5% compared with 8.7% in August.

U.S. stocks ended a choppy session slightly lower on Wednesday with the S&P 500 booking a six-day losing streak, while the Dow Jones Industrial Average

was down 0.3% and the Nasdaq Composite lost less than 0.1%.

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