Wall Street Traders Hold Their Breath Before CPI: Markets Wrap

On Wall Street, traders experienced a day filled with fluctuating stock prices, as many were hesitant to make bold moves ahead of the important Consumer Price Index (CPI) report.

The S&P 500 index managed to close slightly higher, ending the day up by 0.1%. Despite most stocks making gains, major tech companies faced renewed selling pressure. Traders in options markets anticipated significant movements on the CPI release day, with expectations that the index could move up or down by as much as 1% based on current options pricing, a prediction noted by Stuart Kaiser of Citigroup Inc.

Experts are keeping a close watch on the upcoming CPI report, which is seen as a critical gauge of inflation that could influence Federal Reserve policies. Chris Brigati from SWBC emphasized that a strong reading could lead markets to expect no interest rate cuts in 2025 and possibly another hike, whereas a weaker figure might ease some fears associated with Fed tightening.

Recent data from Tuesday indicated that the Producer Price Index (PPI) had unexpectedly eased in December, thanks to falling food prices and stable service costs. However, some PPI components that feed into the Fed's preferred Personal Consumption Expenditures (PCE) measure showed mixed signals.

Krishna Guha at Evercore pointed out that this inconsistency leaves financial markets open to volatility surrounding Wednesday's CPI results as they await clearer indicators of inflation.

On a technical note, the S&P 500 did manage to close above its 100-day moving average after momentarily dipping below it. The Nasdaq 100 index fell slightly by 0.1%, while the Dow Jones Industrial Average gained 0.5%. Notably, a basket of major tech stocks known as the "Magnificent Seven" saw a decline of 1%. On the other hand, small-cap stocks, as represented by the Russell 2000 index, rose by 1.1%. Homebuilder stocks surged following positive earnings from KB Home, while Eli Lilly & Co. shares dropped 6.6% due to lower-than-expected sales.

The yield on 10-year U.S. Treasury notes remained relatively stable at 4.78%. The U.S. dollar weakened after news reports emerged suggesting that Donald Trump's incoming economic team is exploring gradual tariff increases, potentially helping to stabilize inflation.

On the commodities front, oil prices fell from a five-month high amid a tentative ceasefire agreement between Hamas and Israel, which eased concerns regarding supply disruptions from Russia and Iran.

In the cryptocurrency market, Bitcoin experienced a dip following shifting expectations regarding Federal Reserve policies.

For the CPI data, analysts predict a modest 0.2% increase in the core index for December, down from four consecutive months of 0.3% increases. Year-over-year, the core CPI is anticipated to reflect a consistent rise of 3.3%. A recent survey conducted by 22V Research found that a significant portion of investors expect a negative reaction to the CPI results.

Dennis DeBusschere from 22V highlighted that higher interest rates or some tightening of financial conditions seem necessary for the U.S. economy to find a 'macro balance' between core PCE rates and full employment.

As the markets brace for major earnings reports from banks, key institutions like JPMorgan Chase & Co. and Wells Fargo & Co. are expected to demonstrate solid performance in trading and investment banking sectors, which might compensate for declining net interest income.

Corporate Highlights

• Southwest Airlines Co. is halting hiring for certain roles as part of its latest cost-cutting initiative.

• Meta Platforms Inc. plans to reduce its workforce by approximately 5% through performance-based terminations while also looking to fill those positions later in the year.

• CVS Health Corp., Cigna Group, and UnitedHealth Group Inc. have faced scrutiny for charging well above the national average for various specialty generic medications, leading to over $7.3 billion in excessive revenues.

• B. Riley Financial Inc. is under investigation by federal regulators regarding its dealings connected to the bankrupt Franchise Group.

• Capital One Financial Corp. has been sued for misleading customers about a new high-interest savings account that existing accounts did not receive.

• United Rentals Inc. has announced its agreement to acquire H&E Equipment Services Inc. for $3.4 billion in cash, expanding its reach in the equipment rental market.

• Country Garden Holdings Co. has reported another significant loss, continuing its long restructuring process following debt defaults.

Key Events This Week

• Eurozone industrial production data on Wednesday

• Earnings reports from Citigroup, JPMorgan, Goldman Sachs, and others, also on Wednesday

• U.S. CPI and Empire manufacturing report on Wednesday

• Several Fed officials, including John Williams and Neel Kashkari, will be speaking on Wednesday

• TSMC earnings report on Thursday

• ECB's release of the December policy meeting notes on Thursday

• Earnings from Bank of America and Morgan Stanley on Thursday

• U.S. initial jobless claims and retail sales data, along with import prices, on Thursday

• China GDP and retail sales, along with industrial production data, on Friday

• Eurozone CPI data on Friday

• U.S. housing starts and industrial production data on Friday

stocks, CPI, inflation