Market Fades After Initial CPI Rally

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Alex Partida

Dec 13th 2022  .  3 min read

Market Fades After Initial CPI Rally

The much-anticipated results for the U.S. Consumer Price Index (CPI) sent the market soaring to start the daily session on Tuesday.

The median forecast for year-over-year CPI was expected to be 7.3%; however, data showed a modest drop in the CPI to 7.1%. This caused the market to explode higher, giving hope that the Federal Reserve (Fed) would begin lowering the pace of benchmark interest rate hikes. 

CPI data sent the S&P 500 futures flying 130 points before stalling out at 4,180. By the time the opening bell sounded, there was a slight retracement, but it still held around 90 points of the original move. When the market officially opened, profits quickly began to be taken across the indices. This profit-taking caused the market to start rolling over and give back some of the gains made on the pre-market push. 

Profit taking creates strong selling pressure

For most of the opening drive, there was apparent selling pressure on the market, bringing the market lower. This selling pressure drove the market back toward price levels before the CPI data release. It only took the market an hour to rally 130 points, and the gain was mostly erased three hours later. 

The rest of the trading session fluctuated around the day’s low in a choppy and volatile fashion. At the close, price action indicated big money on Wall Street getting positioned for the next major catalysts in the market. 

Rate hike decision, Powell speech tomorrow 

Tomorrow at 2 p.m., the Federal funds rate will be announced, and soon after, Fed Chairman Jerome Powell will answer questions at 2:30 p.m. Eastern. 

The combination of these two events will likely play a dramatic role in how the market moves, not only before but also after the catalyst. 

Bulls, bears looking to gain ground

Now that the CPI has set a precedent, the Fed has to follow through and confirm expectations.

CPI increased the probability of the Fed announcing a 50 basis point hike tomorrow, followed by a 25-point hike at the next Federal Open Market Committee (FOMC) meeting in February. For bulls, this is what the market wants to hear

When Powell takes questions, look for him to use trigger words such as “soft landing” to confirm intentions of lowering the pace of rate hikes.

For bears, the market will look for Powell to be uncommitted to pausing rate increases. If Powell states that this was a one-time decrease, this will dampen the catalyst. This is also all under the assumption that the Fed indeed lowers the rate hike at the meeting tomorrow.

If the Fed does not announce the expected slowing of rate hikes, the market will likely respond negatively. 

Market fights to close green 

The Nasdaq and the S&P 500 were positive to close the session. The S&P 500 futures closed up 0.75%, gaining 30 points, while the Nasdaq futures closed up 1.08%, an increase of 128 points. The Dow Jones futures followed, closing up 0.36%, adding 122 points.