S&P 500 rallies ahead of CPI figures

US stocks rise overnight as investors predict mild CPI figures.

US markets rose overnight, with investors looking to front run official inflation figures which are released Thursday morning US time.

Off the back of renewed optimism the S&P 500 is up 1.28%, rising for 4 out of the last 5 trading days, while the Dow Jones closed 0.8% higher.

It was also a good day for the tech-heavy Nasdaq Composite adding 1.76% to lead the 3 indexes.

Wednesday’s rally was the first time the Nasdaq has risen for 4 straight trading sessions since September.

Most of the rises were from familiar names with both Tesla and Amazon amongst the biggest risers overnight.

What does the market want to see from tonight’s data?

The rising optimism for US shares is off the back of an inflation report.

Basically investors are looking for signs that inflation has peaked or at the very least the US Federal Reserve (the Fed) can cut back on the fastest rate rising cycle in its history.

“There’s a lot of speculation that US inflation figures will support the Fed’s downshift,” said Jess Amir, market strategist at Saxo Bank.

While US inflation is currently at 8.5%, which is well above the central bank’s target rate of 2%, investors are hoping the rate of growth has peaked.

The market is now predicting that core CPI excluding energy and food will be up 0.3% in December or 5.7% year-on-year.

“We welcome it with open arms,” KPMG chief economist Diane Swonk told CNBC.

“It’s great and it helped to fuel consumer spending in the fourth quarter … But it’s still not enough.”

The report is the final bit of data the Fed has before its 1 February meeting.

And while comments from the Fed suggest they will pivot, they still have a mandate to fight inflation which is stubbornly high.

This high inflation rate is actually the reason why gold prices are surging.

Longer-term implications

The good news for investors is economists are now predicting the Fed will pivot and that the US can avoid a recession which a few months ago seemed inevitable.

According to Deloitte’s chief global economist Ira Kalish, the US economy is showing “remarkable resilience”.

“Without a doubt, US growth in 2023 will be slower than in 2022 due to tightening monetary and fiscal policy,” he said in an economic note.

“Yet a recession might be avoided due to declining energy prices, strong employment growth, and easing of supply chain stress.”

The economist points out that even as wages fall in real terms, real consumer spending has grown due to consumers dipping into their savings which remain elevated due to COVID-19.

“The only major sector to experience a sharp contraction has been housing, largely due to higher mortgage interest rates,” he continued.

While the economist says a recession could still happen, Kalish predicts if it happens it will be modest and short-lived.