Let’s call it a holiday gift. When investors unwrap the inflation reports scheduled for release later this week, hope and even joy may be the initial response.
Consumer prices for November are expected to fall by 0.4%, according to the consensus estimate, although Briefing.com advises that even that dose of cheer underestimates what’s coming, and so forecasts a slightly steeper 0.5% decline.
Whatever the final number, Wall Street is comfortable with the view that the first monthly decline in CPI since June is upon us. The catalyst is energy, which delivered some holiday cheer in the form of price declines last month. The January 2006 contract for crude oil, for instance, extended a warm greeting with a 5% price retreat in November, putting the CPI on its presumed downward slope of late. And with Opec making all the right noises today at its current confab about keeping production at its current 25-year high, optimism may be able to thrive for at least another day.
Lower energy prices are expected to have kept core CPI in check last month, which in turn will trim headline inflation for November. But falling energy prices are a double-edged sword when it comes to inflation and interest rates. Indeed, when the Fed convenes tomorrow for assessing the price of money it’s widely expected that the central bank will again raise Fed funds by 25 basis points, which would elevate the rate to 4.25%, based on the December Fed funds futures contract. Lower energy costs may very well inspire consumption confidence in Joe Sixpack, and so the Fed may be inclined to head off the renewed spending burst at the pass.
“With virtually every measure of economic activity surprising to the upside recently, and strong evidence of corporate pricing power, the Fed probably remains concerned that still-elevated energy prices are likely to bleed into core inflation over time,” Michael Darda, chief economist at MKM Partners, told Bloomberg News yesterday.
Tomorrow’s retail sales report for November may attract more-than-average scrutiny as the market assesses just how much renewed spending vigor is stirring. The consensus outlook calls for a 0.4% rise, which would be the highest since July’s 1.7% climb. Adding to the warm and fuzzy feelings will be updates of regional economic activity from the Philly and New York Fed banks, which will probably show “moderate growth, with the industrial production data providing further evidence that key sectors such as building materials and chemicals are, respectively, responding to, and bouncing back from, last summer’s hurricanes,” write the economists at Nomura Securities in New York in a research note published on Friday.
Ditto for the hopeful outlook on the update on last week’s jobless claims, and the continued momentum in industrial production.
The economic buzz could very well juice stocks, but the question of the week is whether the Fed’s fears will take the fizz out of buying equities.
Another potential fly in the ointment may be the October trade balance, which continues to bleed red in extraordinary amounts. Although expectations for a slightly retreat are in order when the figure’s released on Wednesday, this volatile number increasingly holds the potential to surprise and therefore shed uninvited volatility on unsuspecting traders.
No matter–the fixed-income set is calm and feeling in a jaunty holiday mood. A bit of buying was evident in the 10-year Treasury in early trading today. This despite the fact that the economy continues to surprise on the upside. The bond market keeps the faith that its ancient bull market still has legs. The 10-year yield remains steady this morning: at around 4.52%, it remains well below its recent peak of roughly 4.68% set on November 4.
‘Tis the season.