Stocks Fall as Traders Map Out Game Plans for CPI: Markets Wrap

(Bloomberg) — Stocks fell and bond yields rose, with Wall Street traders gearing up for inflation data that will help determine whether the Federal Reserve will cut or hold rates next week.

Just a day ahead of the consumer price index, the S&P 500 pushed further away from its all-time highs. Oracle Corp. sank on uninspiring results. Meantime, Alphabet Inc. rallied as analysts applauded the Google parent’s announcement of a major development in quantum computing through the use of its Willow quantum chip. Homebuilders got hit as Toll Brothers Inc.’s profit-margin projection fell short of estimates.

“Animal spirits take a breather ahead of CPI,” said Jose Torres at Interactive Brokers. “US stocks are stalling near all-time highs as investors await this year’s final CPI report, which is expected to reflect another increase in the annualized headline figure.”

Wednesday’s CPI will offer Fed officials a final look at the pricing environment ahead of their next meeting. Any indication that inflation progress has stalled could well undercut the chances of a rate cut. For now, swap trading projects an 80% chance of a quarter-point Fed reduction this month.

The market is pricing in the smallest implied reaction to CPI since 2021, according to Bank of America Corp. strategists, who argue the readout will matter more this time.

“A softer print can clear the path for a year-end rally, with the second half of December being the second strongest period of the year,” a team led by Ohsung Kwon said. “On the contrary, a firmer print can revamp volatility,” particularly after the post-election rally.

The S&P 500 fell 0.3%. The Nasdaq 100 slid 0.3%. The Dow Jones Industrial Average slipped 0.3%.

Treasury 10-year yields rose two basis points to 4.22%. The Bloomberg Dollar Spot Index added 0.1%.

“Upward momentum wanes as investors trim some profits ahead of upcoming inflation data,” said Craig Johnson at Piper Sandler. “Primary uptrends remain intact, underpinned by bullish market breadth. Use pullbacks that confirm support levels as buying opportunities, particularly among leading sectors.”

CPI figures on Wednesday are expected to show a fourth straight 0.3% increase in the consumer price index excluding food and fuel. The data will be the last major inflation data point before the Fed’s final policy meeting of the year.

A survey conducted by 22V Research shows that 37% of investors expect the market reaction to CPI to be “risk-off.” There is an even split between the percentage of investors who bet the reaction will be “risk-on” and “mixed/negligible.”

Moreover, the 22V tally revealed that 61% of investors believe that core CPI is on a “Fed-friendly” glide path — without a significant tightening of financial conditions or a recession. This is the highest value since February. And 37% say financial conditions need to tighten. That compares with last month’s 45%.

To Bret Kenwell at eToro, one metric to watch is year-over-year core CPI, which has been at 3.3% in each of the last two months. Current expectations again call for 3.3%.

“An in-line or lower reading likely cements a rate cut, while a higher-than-expected result could create some doubt over whether the Fed should cut rates again,” he noted.

The Fed is focused on both maintaining full employment and inflation, which has stubbornly stalled in the 3% range after a steep decline in 2022 and 2023, according to Matthew Weller at Forex.com and City Index.

“Nonetheless, the majority of Fed speakers in recent weeks have indicated that the central bank is on track to cut interest rates by 25 basis points at the upcoming December meeting, even if that perspective isn’t necessarily unanimous at this point,” he noted.

Win Thin and Elias Haddad at Brown Brothers Harriman & Co. say that if the Fed does indeed reduces rates, it will be a “hawkish cut” that sets up a pause in January — and perhaps beyond.

A Bloomberg Economics nowcast supports expectations of a sticky core reading, while flagging downside risk to the headline measure. 

“More worrying for policymakers, inflation looks set to hover uncomfortably above target through next year, with another of our models pointing to a rebound in demand drivers,” according to Scott Johnson at BE.

BE’s model of the broad economic factors influencing US inflation holds mixed signals for the Fed. Disinflationary supply shocks have helped drive inflation below its long-run average in recent months, but factors related to demand are now pushing the other way, after fading over the past year.

“Our US team sees the Fed moving more cautiously in the face of ‘animal spirits’ unleashed by the presidential election,” Jonhson said.

To Ian Lyngen and Vail Hartman at BMO Capital Markets, elevated equity prices are unlikely to factor into the Fed’s policy decision next week. 

“After all, if concerns related to the wealth effect fueling inflation haven’t had a material influence on the Fed thus far in the cycle, there isn’t going to be a tone shift now that stocks have the added boost of a business-friendly election outcome,” they said.

All that market bullishness on equities can be somewhat of a contrarian signal to Birinyi Associates’ Jeffrey Yale Rubin, who said it makes him “uneasy” about a further S&P 500 advance.

“Last year, we were lonely (and preferred it that way) in our bullish view which we articulated in the January edition of Reminiscences: ‘We want to own stocks because we are in a bull market and in a bull market that is what you do, you own stocks’,” Rubin said. “While we remain positive heading into 2025, we are uneasy given the bullish company.”

Dan Wantrobski at Janney Montgomery Scott says technical gauges suggest some caution into year-end. 

“We are currently seeing/hearing a tremendous amount of bullishness ramping up for 2025- from strategist reports, economist forecasts, and from the investment community in general,” he said. “This, in our opinion, may at some point become a contrarian indicator, as many areas of the markets remain overbought heading into the new year.”

Corporate Highlights:

• JPMorgan Chase & Co. said it now expects its net interest income haul to beat expectations for next year, reversing earlier guidance that analysts were being too optimistic.
• Boeing Co. said it has resumed assembly of its bestselling aircraft after a debilitating 53-day long strike, with November deliveries coming in at the lowest in four years.
• Sycamore Partners is in talks to acquire struggling drugstore chain Walgreens Boots Alliance Inc., according to people familiar with the matter.
• C3.ai Inc., a data-analysis software company, reported quarterly revenue that topped estimates and raising its full-year sales forecast.
• Taiwan Semiconductor Manufacturing Co.’s sales rose 34% in November, reflecting sustained growth from AI demand despite concerns that data center building will slow.
• Alaska Air Group Inc., the owner of its namesake carrier and Hawaiian Airlines, laid out plans for a dramatic global expansion while boosting its profit forecast.
• Eli Lilly & Co. approved a program to buy back as much as $15 billion of its own shares amid rapid growth fueled in part by the blockbuster weight-loss drug Zepbound. The company also raised its quarterly dividend 15%.
• Designer Brands Inc., the parent company of footwear and accessories chain DSW, cut its adjusted earnings per share guidance for the full year.
• MongoDB Inc., a database software company, reported third-quarter results and announced the departure of its Chief Financial Officer Michael Gordon. While analysts noted the strong results, Guggenheim said the departure was not a positive.

Key events this week:

• US CPI, Wednesday
• Canada rate decision, Wednesday
• ECB rate decision, Thursday
• US initial jobless claims, PPI, Thursday
• Eurozone industrial production, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.3% as of 4 p.m. New York time
• The Nasdaq 100 fell 0.3%
• The Dow Jones Industrial Average fell 0.3%
• The MSCI World Index fell 0.5%

Currencies

• The Bloomberg Dollar Spot Index rose 0.1%
• The euro fell 0.3% to $1.0526
• The British pound rose 0.2% to $1.2772
• The Japanese yen fell 0.5% to 151.92 per dollar

Cryptocurrencies

• Bitcoin fell 0.4% to $96,524.56
• Ether fell 1.5% to $3,646.5

Bonds

• The yield on 10-year Treasuries advanced two basis points to 4.22%
• Germany’s 10-year yield was little changed at 2.12%
• Britain’s 10-year yield advanced five basis points to 4.32%

Commodities

• West Texas Intermediate crude was little changed
• Spot gold rose 1.2% to $2,691.97 an ounce

This story was produced with the assistance of Bloomberg Automation.

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