Today’s inflation report could mark a turning point in the equity market’s expectations for inflation and interest rates, says Kramer of Mott Capital Management
The stock market’s start-of-year rally is poised to fizzle if a highly-anticipated U.S. inflation report on Tuesday dashes hopes for a quicker retreat in the cost of living in America, warned market analysts. The January CPI reading from the Bureau of Labor Statistics, which tracks changes in the prices paid by consumers for goods and services, is expected to show a 6.2% rise from a year earlier, slowing from a 6.5% year-over-year rise seen in the previous month, according to a survey of economists by Dow Jones. The core price measure that strips out volatile food and fuel costs, is expected to rise 0.4% from December, or 5.5% year over year. “Any core reading under 5.5% would likely be a short-term upward catalyst for stocks, and any reading above 5.5% would likely be viewed negatively by the markets over the very short-term,” said George Ball, chairman of Sanders Morris Harris. The Federal Reserve Bank of Cleveland’s Inflation Nowcast is predicting a hotter-than-consensus CPI report. As of Monday, the Cleveland Fed’s model shows headline CPI to rise 0.65% month over month, or 6.5% on a yearly basis. For core CPI, the tracker estimates an 0.46% monthly increase and a 5.6% year over year advance. A hotter-than-expected inflation reading on Tuesday could mark a turning point in the equity market’s expectations for inflation and interest rates, with “far-reaching implications,” said Michael J. Kramer, founder of Mott Capital Management. Kramer thinks equity market have been in a “fantasy land” and that investors don’t appear to be “greatly concerned” about the coming CPI report, despite warnings from various parts of the markets. “It seems that despite the expected increase in inflation from analysts and the warnings from the inflation swaps, options, and bond market about a potential trend of higher-than-previously-expected inflation in the future, the equity market is still oblivious,” said Kramer in a Sunday note. “If CPI does come in hotter than expected, the equity market may find itself on the wrong side of the trend again, just as it has several times over the past 12 months.” NN: Here we go again.. we spin the wheel and see where the little silver ball lands.