Pro Perspectives 12/13/22

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December 13, 2022
 
The past three monthly inflation reports created outsized moves in the stock market.  Each produced a better than 5% trading range.
 
Today was nearly another one.  The November inflation report showed a cooling in the rate-of-change in prices.  Markets broadly performed well (stocks, bonds, commodities). 
 
We came into this morning's report, focused on the month-to-month change in prices (the current environment). 
 
That came in at just 0.1%.  Annualize that, and we are clearly well below the Fed's 2% inflation target.  If we annualize the monthly change in prices over the past three months, we get a 3.65% inflation rate.  
 
Bottom line:  Both of these annualized numbers give us a gauge on the recent rate-of-change in prices.  If the Fed wants evidence that inflation is "coming down" this chart tells that story …
 
With that, we have the Fed meeting tomorrow. 
 
Remember, we heard from Jerome Powell just two weeks ago.  He made a prepared speech at the Brookings Institution and took questions.
 
Let's revisit what he said …
 
In that prepared speech he said, it now "makes sense to moderate the pace" of rate increases.  Moreover, the "time for moderating the pace of rate increases may come as soon as the December meeting" (that's tomorrow).
 
Additionally, in the Q&A session at Brookings, he said, 1) "I don't want to over tighten."  
 
With this in mind, the market is pricing in a 50 basis point hike tomorrow.  Any accompanying language that suggests they might sit and watch from that point, would be rocket fuel for markets (as the Fed would be taking its foot off of the economic brakes).
 
And remember, we've been watching these big technical levels in stocks.  We head into tomorrow's Fed meeting testing both the 200-day moving average, again (the purple line), and the big trendline that defines the decline of the year.