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Financial Market Update – Week of 12/12

December 12, 2022

Major U.S. equity indexes traded lower last week as investors interpreted wholesale pricing inflation data to end the week. Heading into this week, we will keep our eyes out for reaction to the November Consumer Price Index (CPI) data release and the December Federal Reserve meeting.

For last week, ending on December 9, the S&P 500 dropped by 3.37%, the Nasdaq 100 shed 3.59%, and the Dow Jones Industrial Average decreased by 2.77%.

Inflation Expectations

Overall, last week was a quiet one for economic data releases, but Friday did feature November’s Producer Price Index (PPI) data release, which can give clues about future CPI data. The report showed wholesale prices rising 0.3% in November month-over-month, above the Dow Jones economist estimate of 0.2%.  

Core PPI, which excludes volatile food and energy, increased by 0.4% in November month-over-month versus estimates of 0.2%. 

Will the hotter-than-expected producer pricing keep a 75-basis-point hike on the table? More on that in a moment.

Consumers Sentiment Improves

Surprisingly, consumer sentiment rebounded in early December, with the most recent preliminary report from the University of Michigan showing a 59.1 reading versus expectations of 56.9.

Gains in consumer sentiment were seen across multiple demographic groups, particularly in higher-income families with large stock holdings. 

Mixed Signals & Treasury Yields

These recent data releases seem to have created some mixed signals for market participants. The PPI data, for example, showed its slowest gain year-over-year since May 2021, but monthly increases were above expectations.

The higher-than-expected PPI data may have caused investors to temper inflation reduction expectations for a moment and continue to assess data for new clues.

Stocks fell on the heels of this PPI data, while bond yields advanced. This rise in 10-year note yields came after four consecutive weeks of decline. Friday’s weekly close showed the benchmark 10-year note yield settling at 3.566%, up from the previous weekly settlement near 3.50%.

When the 10-year note yield moves, so do mortgage rates. The average 30-year mortgage rate is hovering at around 6.00% at the time of writing. 6.00% is a welcome sight for many would-be borrowers, as 30-year mortgage rates were near 7.00% in November.

What to Expect From the Fed

Markets are now focusing on Tuesday’s CPI data release and the December Fed meeting on Wednesday. The Federal Funds rate and the Federal Open Market Committee statement are on tap for a 2 p.m. release.

As of Monday morning, the CME FedWatch Tool shows a 77.0% chance of a 50-basis-point hike this week and an outlier chance of 23.0% of a 75-basis-point hike this week. Tuesday’s CPI data could influence the Fed’s perspective this week and may help to determine the trajectory of rate hikes in the January or March meetings.

The Takeaway

The final CPI reading and Fed meeting of 2022 are the focal points in what is shaping up to be a busy week ahead. PPI data coming in hot for the month of November has many market watchers on their heels, as a higher-than-expected CPI print could be in play.

A surprise rise in consumer sentiment helps the outlook for the holiday shopping season, but the near-term direction could be based on what CPI looks like this week as well as the Fed’s tone heading into the end of the year.