Pro Perspectives 1/11/23

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January 11, 2023
We head into tomorrow's huge inflation report, with stocks closing on the 200-day moving average (the purple line in the chart below).  And trading just below this trendline (yellow) that represents the bear market of 2022.

A weak inflation number tomorrow, would be a clear catalyst for a bullish technical break out in stocks.
Let's take a look at the CPI index …
You can see in this chart, inflation over the past six months on this headline index has already leveled off.  The rate-of-change in prices, inflation, has clearly been curtailed.  That's good!
But even if tomorrow is a seventh consecutive month of mild monthly inflation, when measured against the low base of twelve months ago, it's still a big number (and will be for months ahead).   In fact, even if the November to December change in prices within this index, were zero, the year-over-year inflation would still be 6.8% inflation.  This the "base effect" that the Fed once used, back in 2021, to dismiss inflation as "transitory."
Bottom line, what matters is the monthly change in prices. With that, let's look at some inputs into CPI that we know.  Will it be weak? 
First, gas prices:  The Energy Information Administration (EIA) does a weekly survey of gas stations across the country.  Those survey results show a decline in gas prices by about 8% in December (and down 35% since June). Transportation carries almost a 1/5th weighting in the CPI calculation.
Used Cars:  The Manheim used car price index was UP less than 1% in December.  That breaks a sixth months of consecutive price declines.  Overall used car prices were down 15% from the beginning of the year.
New Car prices:  Cox Automotive says average new car prices were up 1.9% in December..
Rents:  The Apartment List Rent Report showed a fourth consecutive monthly decline in rents, down 0.8%.
House prices: says the median house price was up 1.3% from November to December.  That's down 8% from the June peak.  What about mortgage rates?  Mortgage rates finished December about 17 basis points higher than the month prior.
And we know from the ISM services report, released earlier this week, services prices were down in December.
Food is the only big component remaining:  This has been a hot area of the inflation report this year, finally showing some signs of cooling in November. As a proxy, the FAO Food Price Index, which measures global food prices, fell in December for a ninth consecutive month.
So, the price data look mixed in December.  But as we know, the government data tends to be stale.  If we look back at end of November data, from these same sources listed above, prices were broadly declining.      
With all of this in mind, by no coincidence, the Fed has three officials (speakers) on the calendar before midday tomorrow. 
We should expect them to continue doing what they've been doing:  Combatting optimism, with threats of higher rates at the economy and financial markets, in order to keep a lid on confidence. 
As we discussed yesterday, with the 10-year yield at 3.55% heading into tomorrow's number, the bond market isn't in agreement with the Fed's narrative.  That gives courage to stock investors.