U.S. stocks rally ahead of CPI report

U.S. stocks rose Wednesday ahead of the release of the December consumer price index (CPI) report on Thursday, which investors anticipated would put less inflation pressure and help reduce the Federal Reserve's rate hikes.

The Dow Jones Industrial Average ended the trading day at 33,973.01, up 268.91 points or 0.80 percent. The S&P 500 rose 1.28 percent to 3,969.61. The Nasdaq Composite led the indexes yet again, rising 1.76 percent to 10,931.67.

In tech, Amazon.com and Tesla stock drove a mega-cap rally, with Apple, Microsoft and Alphabet parent company Google performing well.

With the CPI report set to be released today, investors expect that inflation will have proceeded to ease in the final month of 2022.

​​"The expectation with this week's Consumer Price Index is for further easing of inflation pressures. Anything less than broad-based improvement will rattle investors' nerves and keep the Fed active," Greg McBride, chief financial analyst at Bankrate, said.

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Investors betting on smaller rate hikes

According to Dow Jones, the CPI is expected to be 6.5 percent higher year on year in December. On an annual basis, core CPI is expected to climb 5.7 percent. In November, those numbers were 7.1 percent and 6.0 percent, respectively.

"We have had two cooler month-over-month CPI prints in a row," Alex Pelle, U.S. economist at Mizuho Securities, said. "A third print on the soft side would more clearly establish a trend in terms of market sentiment, and will give additional momentum to the 'Fed pivot' trades, at least for a time."

CNBC's Jim Cramer discussed the importance of the December CPI for investors on Wednesday. He said the report is "a big deal" because "we're looking to see if we're nearing the end of the period where companies can raise prices with impunity."

According to CNN, despite the Fed's estimates that inflation will persist well above three percent until 2024, inflation swaps imply that investors "believe" inflation will fall to 2.5 percent in the next seven months.

Regardless of Wall Street's renewed optimism, Cramer claimed that the December CPI stats could be troubling for the market and corporations scheduled to report their quarterly results this month.

"Unless inflation's coming down in all the right places, this earnings season could be very rough," he said.

Several companies, including Bank of America, Delta Air Lines, JPMorgan Chase and UnitedHealth are also scheduled to report revenue for the last three months of 2022 later this week.

This week's other data, such as the New York Fed's inflation expectations and small firms with job vacancies and hiring plans, signal a slowing of inflation and labor markets.

According to reports, a tame inflation report should lock in a quarter-point Fed rate increase at the Fed's February 1 gathering — down from 50 and 75 basis points in the previous two meetings.

Reporters at the Associated Press said that if Thursday's data and other reports reveal that inflation is not improving as much as expected, the Fed might have to tighten interest rates.

Asian stocks rising

While U.S. stocks are dynamic, Asian markets are steadily rising. The MSCI Asia Pacific index rose 2.5 percent on Tuesday, closing at 535.69 points, a 24.6 percent increase from its record low on October 24.

Nasdaq's Golden Dragon China index — which tracks Chinese companies listed in the United States — rose 0.72 percent on Monday, 71.3 percent above where it was in late October.

Morgan Stanley analysts said in a Tuesday note that the bank had lifted its share price targets for Chinese companies and expected China to outperform the global equity market this year.

Traders in the futures market continued to speculate that the Fed would only raise interest rates by a quarter point at its next meeting. On the other hand, some analysts said lawmakers would raise the federal funds target rate by half a percentage point.

"One real thing I think underpinning the market is simply the fact that the market doesn't believe the Fed when they say they're going to keep hiking this year."

Brad McMillan, chief investment officer for Commonwealth Financial Network.