The Fed's Christmas List

The stock market is always a battle between the bears and the bulls, the buyers and the sellers, fear, and greed. When one side appears weak, the other will press its advantage. It’s a simple explanation that puts yesterday’s rally in a useful framework.

That is, support at 3,920 on the S&P 500 held for two consecutive days, and that was enough strength to give investors confidence to take stock prices higher.

Was there any new info that needed digesting? Not really. The Fed didn’t say anything, there wasn’t any significant earnings news, no important economic data…

That changes today, however, when November's Producer Price Index (PPI) is released this morning. The PPI measures how much the companies that make stuff are paying for the materials they need to make stuff. In other words, it measures inflation at the company level, the assumption being that higher prices at that level will be passed on to the consumer, which is then measured by the Consumer Price Index (CPI).

Today’s PPI is the first inflation data we get from November. And it was expected to show a pretty sizable decline. October’s year-over-year rise was 6.7%. The November read was expected to show a year-over-year rise of 5.9%.

The Fed was praying to Santa to get its Christmas wish: that this report would come in as expected or better. Because as we discussed yesterday, bond prices are pricing in rising expectations for a recession. Fed Chairman Jerome Powell does not want to go down in history as the guy that ignored inflation for nearly a year and then caused a recession to fix his mistake.

It would be better for everyone if inflation would cooperate and retreat under the weight of the rate hikes that have already happened. Sure, that’s what you’d call a Goldilocks scenario. And it’s all Powell’s got right now.

So, I don’t know what Powell did to get on Santa’s naughty list, but he is not getting his Christmas wish. Instead of the expected decline for November’s PPI, it actually showed a slight gain.

And that’s going to set off more talk of recession, projections that the so-called “terminal rate” for interest rates will now be higher than 5.25% and, sadly, very likely send the stock market on a new leg lower.

3,920 on the S&P 500 is very unlikely to hold as support, given this new inflation report. The 50-day Moving Average (MA) for the S&P 500 sits at 3,834, likely the next stopping point. And if next week’s CPI report is also worse than expected, the S&P 500 will head lower still.

That’s your “Morning in the Markets,” sorry, it’s not better news.

Take care, and I’ll talk to you soon.