US stocks are markedly higher Wednesday as investors anticipate another benign inflation report later on Thursday.
Last month saw both a deceleration in CPI and PCE, and most of the intervening data points, including last week’s weak Services sector business sentiment survey and signs of descending wage inflation in the December Payrolls report, seem to support the idea that US core inflation appears to have peaked and is now slowing under the weight of decelerating growth, driven by tighter monetary policy and a maturing post-pandemic economy.
The CPI headline print should be on a clear downtrend due to the significant falls in the US gasoline prices in December; when taken together with the decline in wage inflation, it ticks off more of the Fed downshift boxes, not only auguring for a 25 vs 50 bp hike at the February meeting but brings forward the ultimate pause and eventual rate cut playbooks sooner than later to support Main Street’s recovery from the post-pandemic slump, improving the odds that the Fed tames inflation without causing a recession or a soft landing if you may.
The debate as we advance, and something markets will have to wrap their heads around, is what a ‘soft landing’ actually looks like.
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Bond markets seem to agree and have rallied since the start of the year on signs of slowing wage growth in the world’s biggest economy — a critical pressure point for Fed officials whose approach to monetary policy will be “completely data-dependent.”
But critically, any thought of a renewed monetary policy shock is unlikely, given the current disinflation. Still, China’s bumpy reopening is a crucial source of upside risk to global growth and commodity prices in 2023 and could intensify the global inflation impact.