The US is all set to report its inflation figure for December 2022, today. It seems like inflation has already peaked out, as after a 9.1% print in June 2022, the YoY CPI has fallen for 5 straight months thereafter, with the year’s low of 7.1% in November 2022. The market is expecting this trend to continue with yet another fall of 60 bps to 6.5% for the last month, which would be the lowest in 12 months.
The cues from the recent Nonfarm payroll data were mixed, making it difficult to gauge the magnitude of the drop in today’s inflation data. The job creation remained higher than the estimate, at 223K, comfortably surpassing the estimate of 200K, but still, a slowdown was seen compared to the November 2022 revised figure of 256K. A deceleration in wages was also seen, with hourly wages increasing 0.3%, compared to 0.4% a month ago, while unemployment fell to the lowest level in decades.
The lower CPI data is necessary for the US Fed to start abating rate hikes in order to bring inflation under the targeted 2%, which has already begun. Fed Chairman Jerome Powell has made his stance clear to keep pushing inflation downwards even at the cost of job losses and some pain to American families. But the bigger question is can a 60 bps drop help the Dow to soar above 34,500?
First of all, a magnitude of 60 bps drop in inflation seems too optimistic in my opinion. Although oil prices have also cooled down noticeably in the previous month, even plunging below US$76 per barrel (brent crude) for a brief period, still the market seems too optimistic which has its own cons. The higher the expectation, the more difficult it becomes to meet it. This leaves some leeway for a disappointing number. So in case, there is a miss compared to the forecast 6.5% print, the Dow Jones might again take a U-turn to test the 33,500 – 33,450 support zone.
The second case would be, that the CPI figure meets the market’s expectations, even in that case it seems like it has already been discounted in price. The Dow Jones jumped around 455 points in the previous two sessions, minimizing the scope of a further rally amid the expected CPI data. The last time inflation dropped by 60 bps in November 2022 (from 7.7% to 7.1%), which even beat the expectation of 7.3%, the Dow Jones spiked on that day but the rally fizzled out in a jiffy and the index plunged in the next 4 consecutive sessions.