Investors again underestimate inflation |  CNN Business

Investors again underestimate inflation | CNN Business

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Investors are holding their breath in anticipation of Thursday morning’s Consumer Price Index inflation report – arguably the most important economic data of the year.

Much depends on the outcome – if inflation continues to fall, it could support a market recovery, while higher-than-expected inflation could sink stocks.

What’s happening: After a tumultuous 2022, the Federal Reserve’s fight against inflation has become a top concern on Wall Street, with investors attaching significant importance to any economic data that might indicate what the Fed will do next.

But recent data has been muddy. December’s hotly-anticipated jobs report had something for everyone – a slowdown in wage growth and a drop in unemployment. Minutes from the Fed’s meeting, released last week, also did not offer many conclusive answers.

That’s why this CPI report will grab attention and go a long way toward shaping market expectations for the first Federal Reserve meeting of the year.

The Fed Funds Futures market still sees a high probability of a quarter-percentage-point rate hike on February 1, but the results of the CPI report could change that.

What Wall Street Expects: Inflation cooled more than expected in October and November, so investors are optimistic that the downward trend will continue in December and beyond. But a key reading of inflation-linked business data suggests they expect inflation to fall faster than economists and Fed officials. do.

December consumer prices were estimated to have increased 6.5% year-on-year, down from 7.1% in November, according to economists Refinitiv in a survey. On a monthly basis, the CPI is expected to show no change from November.

Still, inflation swaps, transactions in which one investor agrees to exchange fixed payments for floating payments tied to the rate of inflation, suggest investors believe inflation will fall to 2.5% over the next seven months, even though the Fed’s own projections say inflation will remain well above 3% until 2024.

The inflation swaps market is considered one of the easiest ways to gauge how the market thinks inflation will change over the next 12 months. Current expectations for a sharp decline in CPI suggest that investors think the Fed is likely to cut rates this year in response to falling inflation levels.

with me: Investors still seem to be forgetting the basic rule of the market: don’t fight the Fed.

“This week’s consumer price index expects further easing of inflationary pressures. Anything less than an across-the-board improvement will rattle investors’ nerves and keep the Fed active,” said Greg McBride, chief financial analyst at Bankrate.

Bets that the Fed will move away from raising interest rates soon, even though officials say they won’t, could mean more market volatility is ahead.

U.S. stocks may be volatile, but markets are soaring in Asia.

Investors, buoyed by China’s departure from its economically painful zero-Covid policy and loosening of regulations for tech companies, are pouring cash into the world’s second-largest economy.

The MSCI Asia Pacific index, which excludes Japanese companies, jumped 2.5% in Tuesday’s trading to close the day at 535.69. That’s up 24.6% from its last low on October 24, my colleague Anna Cooban reports.

A revival in investor sentiment towards Chinese stocks fueled the rally. The MSCI China index rose 2.4% on Tuesday to 50% above its Oct. 31 low. Hong Kong’s Hang Seng index jumped 38% over the same period.

Nasdaq’s Golden Dragon China Index, which tracks U.S.-listed Chinese companies, rose 0.72% on Monday, up 71.3% from its late-October trade.

Morgan Stanley analysts said in a note on Tuesday that the bank raised share price targets for Chinese companies and “expect[s] China will achieve the highest performance of the global stock market in 2023.”

Wells Fargo was once the number one player in the multi-trillion dollar US mortgage market. Now the scandal-plagued bank is taking a step back as it grapples with the impact of higher interest rates and regulatory issues.

The company announced Tuesday that it will refocus its mortgage business on serving bank customers and minority homebuyers instead of acquiring new customers, my colleague Matt Egan reports .

The retreat is likely to cause Wells Fargo to lay off at least some employees, though the bank has not released any details. A spokesman declined to comment on potential layoffs.

“Mortgage is an important relationship product, and our goal is to continue to be the primary lender for both Wells Fargo bank customers and minority homebuyers,” Kleber Santos, Wells Fargo’s head of consumer lending, said in a statement.

The move comes as Wells Fargo continues to struggle with regulators. Last month, the Consumer Financial Protection Bureau ordered Wells Fargo to pay a record $1.7 billion fine for “widespread mismanagement” over several years that damaged 16 million customer accounts.

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