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New data showing inflation in the U.S. hasn’t cooled as quickly as previously thought could help spur a selloff in stocks and bonds, according to a top Deutsche Bank strategist.
In his latest chart of the day, Jim Reid, Deutsche Bank’s head of thematic research, highlighted the latest annual revisions to the monthly consumer-price index data, which were released by the Bureau of Labor Statistics on Friday.
Every year, the BLS updates the seasonal adjustments incorporated in the monthly data, revising the numbers from the previous five years. The latest adjustment impacted data released between the beginning of 2018 and end of 2022. It also recalibrates how changes in prices for various goods and services will be factored into the headline numbers going forward.
The latest revisions, released Friday, erased a decline in consumer prices month-over-month in December, what was previously pegged as the first such decline since April 2020. According to the new figures, prices actually rose by 0.1% month-over-month in December, instead of falling by 0.1%, as previous data indicated.
See: Americans don’t expect inflation to fall this year
This could create problems for markets, since signs that inflation has slowed over the past six months helped spur a rally in stocks. The S&P 500 has risen more than 17% as of TK from its lows reached in mid-October, according to FactSet data.
“Core inflation has still been falling since June but the pace has been less extreme than previously thought,” Reid said in a client note on Monday.
Furthermore, Reid tabulated that the 3-month annualized rate of core CPI as actually accelerated to 4.25%, up from 3.14% previously.
DEUTSCHE BANK
It’s not clear yet whether markets have completely priced in this higher rate of inflation, which means U.S. stocks and bonds could face an uncomfortable reckoning on Tuesday, when the January CPI report is set to be released. The data are due out at 8:30 Eastern Time.
“…[T]hese revisions, alongside fresh increases in used car prices (Manheim biggest increase for 14 months in January), and the recent strong payrolls print complicates the near-term inflation picture and the job of the Fed,” Reid said.
“Some of this uncertainty has been priced in with US 10yr yields up c.+42bps from intra-day lows just 7 business days ago on February 2nd,” Reid added.
Still, it’s “very hard to know what’s priced in for tomorrow market wise, given all the moving parts,” he said.
Another risk to markets is that the latest adjustments from the BLS give more weight to a key measure of housing costs known as owners’ equivalent rent, which hasn’t declined as quickly as other aspects of the CPI price basket, Reid said.
“At the moment, OER is still running hot so a higher weight will likely keep some upward pressure on core CPI in the near term. However, later in the year this could work in the opposite direction,” Reid said.
U.S. stocks fell last week, with the S&P 500
SPX,
and Nasdaq Composite
COMP,
suffering their worst weekly declines since December, while the Dow Jones Industrial Average
DJIA,
fell for a second consecutive week.
Market strategists blamed the weakness on fears that stubbornly high wage growth and services-sector activity could help to reverse the decline in price pressures observed over the past six months.
U.S. stocks are reversing some of those losses on Monday, with the S&P 500 up 1.1% and Dow up 1%, while the Nasdaq was up 1.5%, at last check.
But some fear stocks could sell off on Tuesday even if headline CPI continues to moderate. Simon Ree, author of the Tao of Trading, has said Tuesday’s data release could be a “sell the news” event for stocks.
Economists polled by the Wall Street Journal expect headline year-over-year inflation to slow to 6.2%, down from 6.5%.
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