US Stocks Rebound, CPI Report to Influence Fed's Next Move

By: Miguel A. Rodriguez

09:29, 14 February 2023


US stocks recover losses from the previous week, with Nasdaq increasing due to Meta Platforms' rise. Meanwhile, the Federal Reserve's decision on interest rates next month may be impacted by the consumer price index report, which is projected to show a decrease in core CPI. 

On Monday, US stocks rebounded and recovered much of the losses they incurred in the previous week. The Nasdaq had fallen by 2.4% in the previous week, while the S&P had lost 1.1%, making it its worst week since December. 

However, on Monday, Nasdaq shares increased, driven by Meta Platforms, which rose by more than 3%. The company, which is the parent company of Facebook (META) and Instagram, is reportedly contemplating further layoffs as management prioritizes cost control. 

Related: Dow Jones analysis and price predictions 

The prevailing view among investors and market analysts is that the Federal Reserve will raise interest rates by a quarter of a percentage point next month. The market forecasts that interest rates in the United States could slightly exceed 5%, with a maximum or terminal interest rate of around 5.1% in the upcoming months. Thereafter, the Federal Reserve may temporarily halt the increases and evaluate the effects of the monetary policy tightening initiated in early 2022 on inflation and the overall economy. 

Today's release of the consumer price index report for January will play a crucial role in the Federal Reserve's decision on the direction of interest rates. This, in turn, could significantly impact market expectations across various assets, including the stock market, the US dollar, and treasury bonds

According to analysts, the year-on-year headline CPI figure for January is expected to be 6.2%, a decrease from 6.5% in December. However, more crucial than this figure is the core CPI, which is the focus of the Federal Reserve. The core CPI is projected to decrease to 5.5% year-on-year from 5.7% the previous month.  

If the CPI data confirms a continued downward trend, it would improve market risk sentiment, positively impacting the equity and fixed income markets while pushing the US dollar lower.  
Related: How to Fight Inflation – 5 Inflation-Proof Assets 

However, if the data surprises the market by exceeding expectations with a higher figure, it would have the opposite effect, causing market interest rates (treasury bond yields) to rebound, and stock indices to fall. Morgan Stanley (MS) is one of the few investment banks that predicts a less favorable CPI than the market expects. 

While traders await the release of significant data, yesterday they opted to realize profits from short positions in the stock market from the previous week and sold the US dollar against all pairs, except for the Japanese yen. The uncertainty surrounding the appointment of the next Governor of the Bank of Japan at the end of next week caused the USD/JPY pair to increase by just over one figure. 

USD/JPY price chart

Sources: Bloomberg, Reuters 

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