The market wants to celebrate the CPI slowdown, but the Fed could spoil the party

Stocks continue to rally as market players await the CPI report at 8:30 AM ET. The S&P 500 jumped 1.4% on Monday and held above the key support of over 3900.

The S&P 500 rose about 5.5% last month on a weaker-than-expected CPI report, but conditions are quite different this time around. The market celebrated the idea of ​​”peak inflation” last month, but the S&P 500 is now about the same level it was at the end of the day in the latest CPI report.

Over the past month, the market narrative has shifted away from consumer inflation concerns. He was most concerned about how strong employment has been and the potential for a recession as higher interest rates take a toll.

A 0.5% interest rate hike at Wednesday’s Fed meeting has been predicted since the last CPI report, and the market even had a short-lived rebound when Chairman Jerome Powell hinted it was very likely. .

If CPI comes in lighter than expected yet again, can market participants expect the same kind of euphoric response that occurred on Nov. 10? Probably not. A soft CPI is already expected to a large extent, and this is reflected in the 0.5% rate hike expected on Wednesday. The main economic problem remains the terminal rate: how much will rates rise in the coming months? Powell and the Fed are focused on labor costs more than anything right now, and the CPI isn’t going to change that.

One of the challenges facing traders is that even if the market celebrates a weak CPI report on Tuesday, they will immediately face the Fed’s policy meeting on Wednesday. Powell is highly unlikely to suggest that the battle against inflation is won. The Fed will remind the market that it still has a lot of work to do and that a soft CPI report doesn’t do much to shift what it needs to do in the coming months.

The primary market narrative has shifted to worries about a recession early next year. The fact that interest rates have fallen has more to do with fears of an economic slowdown than a celebration of lower inflation.

We have a very complicated trading environment. A weak CPI report will excite some market players, but then we have to worry about the Fed spoiling the party. If you want to navigate this market effectively, stay quick and flexible.

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