U.S. inflation reports are no longer eliciting the outsize swings in U.S. stocks that investors witnessed during 2022. One longtime stock-market strategist and trader offered an explanation in an interview with MarketWatch.
After more than a decade of near-irrelevance, monthly reports on consumer-price inflation emerged as marquee events for markets last year, surpassing even the monthly nonfarm payrolls number released by the Department of Labor in terms of their impact.
The S&P 500 recorded its biggest daily swings of 2022 following the release of monthly CPI numbers, including on Sept. 13, when hotter-than-expected August data sent the S&P 500 down 4.3%, and on Nov. 10, when weaker-than-expected October numbers helped send the large-capitalization index rallying 5.5%.
But something seemed to change by the start of the new year that blunted the impact that monthly CPI reports were having on markets.
The S&P 500 exhibited an average move of 1.9% in either direction on CPI release days in 2022, according to an analysis by Dow Jones Market Data and MarketWatch. That figure has shrunk to 0.7% since the start of 2023 through Wednesday following the release of the March inflation report.
Interestingly, the reverse is true for the producer-price index, the premier U.S. data on wholesale prices, although the market response to PPI has typically been more muted.
The S&P 500 logged an average swing of 0.8% in response to PPI data released in 2022, including Thursday’s report. But the average move following the release of PPI data in 2023 has increased to 1.1%.
What changed, exactly? Steve Sosnick, chief strategist at Interactive Brokers and a former trader at storied investment bank Salomon Brothers, shared a few thoughts in a phone interview with MarketWatch.
First, it’s important to remember what the setup for markets was heading into 2022. The Federal Reserve was still insisting that inflation, which had already perked up in 2021, would be transitory.
On Dec. 31, 2021, Fed funds futures were anticipating that the central bank’s policy rate target would rise to 1% in February 2023.
That prediction ended up being way off base. Instead, the Fed delivered another 25 basis point hike at its February meeting, bringing the upper bound of its target range to 4.75%. It followed that with another 25 basis point hike in March, bringing the target to 5%.
After more than a decade of rock-bottom interest rates, the Fed’s aggressive rate hikes in 2022 came as a huge shock to markets.
What’s more, U.S. gross domestic product growth briefly faltered, and turned negative for two consecutive quarters in the first half of 2022, although the National Bureau of Economic Research, the official recession arbiter, didn’t declare that one had occurred.
Negative growth revived fears that the U.S. economy might become mired in stagflation, which eased when the economy returned to growth in the second half of the year, Sosnick said.
“The Fed moved way faster than markets had priced in,” Sosnick said. “That really freaked people out.”
Investors’ apparent apprehension lingered until late into 2022. By the time data for December were released, headline CPI had cooled to 6.5% year-over-year after surging as high as 9.1%, according to the June report, which was released on July 13. That marked the highest level in more than four decades.
To be sure, U.S. stocks are looking much calmer in 2023 than they did in 2022, when the S&P 500 declined by more than 19%, according to FactSet data. The rolling seven-day average percentage-change for the S&P 500 has fallen to less than 0.3% as of Wednesday, the lowest level since November 2021, according to DJMD.
Other analysts have noted the declining relevance of inflation data.
Brian Levitt, global market strategist at Invesco, said in emailed commentary on Wednesday that focusing on inflation now seems “almost passe.”
Instead, investors are shifting their focus to whether the Fed’s aggressive tightening will cause another recession, a possibility that was noted in the latest batch of Fed meeting minutes released Wednesday.
After initially rallying following the release of the March CPI data, the S&P 500
SPX,
+0.33%
finished off 0.4% on Wednesday. The Nasdaq Composite
COMP,
+0.28%
fell 0.9%, the Dow Jones Industrial Average
DJIA,
+0.30%
declined by 38.29 points, or 0.1%.
The data showed the yearly rate of consumer-price inflation slowed to 5% in March, down from 6% a month earlier, touching its lowest level since May 2021. That was roughly in line with the median forecast of 5.1% from economists polled by the Wall Street Journal. The PPI data released Thursday showed the 12-month rate of change slowed to 3.6% in March from 4.5%.
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