(Bloomberg) — This is the week everyone has been waiting for. With the release of key inflation gauges, the Federal Reserve’s interest rate decision, and the subsequent comments of Chairman Jerome Powell, investors are hoping to finally get a clear picture of what’s going to happen next. What is going to happen to a declining stock market and economy in 2023.
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But after a volatile year when the S&P 500 Index saw its biggest annual loss since 2008, stock traders are braced for one thing for sure in the coming sessions: more volatility. .
Inflation reports have rocked stock markets all year, prompting the market to assess the possible policy path of the central bank amid relentless price increases. This week’s reading of the consumer price index is important, as signs of falling inflation could boost stocks later in the year by easing expectations of further Fed hikes.
Over the past six months, the S&P 500 has averaged about 3% volatility in both directions on the day the CPI was released, according to data compiled by Bloomberg. That’s the highest level since 2009. The S&P 500 has fallen on seven of the 11 CPI reporting days this year.
The US central bank is widely expected to deliver a half-point gain at the close of its meeting on December 14. So, stock investors are more focused on what Powell said in the press conference. then, look for any hints on the term roadmap for interest rates. The Fed’s outlook for the US economy will also be a focus, along with any changes in central banks’ interest rate forecasts.
Read more: Top Fed rates dashed Wall Street’s hopes of a cut in 2023
Of course, global money managers are hoping for 2022 to end on a high after the S&P 500 posted two consecutive months of gains for the first time in more than a year in October and November. Betting on how things will play out in the coming months when the S&P 500 is seeing its first year of decline since 2018 is a particular challenge.
“Getting the right placement is extremely difficult for investors right now,” said Erik Ristuben, chief investment strategist at Russell Investments. “Fed policy is really stalling the stock market party until Wall Street is confident the central bank is nearing completion of rate hikes.”
Investors’ lack of conviction as they head into this crucial week is evident in the options market. The Cboe Volatility Index, or VIX, has fallen 80% of the days in the past 10 weeks ending December 2. That’s happened just three other times since Wall Street introduced its so-called fear gauge. fear, data compiled by Bespoke Investment Group performance.
“There is a feeling that the VIX has dropped too much, considering big events like CPI data and next week’s interest rate decision,” said Brent Kochuba, founder of analytics service SpotGamma. “People are starting to realize the fact that maybe things have become too complacent.”
Meanwhile, the need to hedge against a stock’s losses pushed the Cboe equity deal rate to 1.5 on Wednesday – its highest level since 2001 and more than double average for this year.
Futures market pricing shows the Fed’s policy rate peaking at around 4.9% in the first half of 2023. That means the Fed still has room to raise rates as it tames high prices. According to Carson Investment Research, over the past eight rate hike cycles, the Fed has continued to raise borrowing costs until they are above the CPI.
A half-point increase on December 14 will put the federal funds rate in the 4.25%-4.5% range. Meanwhile, Tuesday’s CPI report is expected to show the index fell to a 7.3% annual gain in November, from 7.7% the previous month. But nothing is guaranteed. Stocks wobbled on Friday following a hotter-than-expected report on producer prices.
“These are definitely tough times for investors,” said Stephanie Lang, chief investment officer at Homrich Berg. “If history is any indication of the Fed’s excessive track record, that makes us cautious on equities.”
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