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There has been a lull in the bullish price action the past few sessions. That's not altogether surprising given suggestions entering the week that the stock market was overbought on a short-term basis (i.e., since the election) and due for some consolidation. There was also the catch-all worry about the market's valuation being stretched.
The latter is a justifiable worry even if it isn't necessarily a justifiable basis for many at this point to abandon a positively charged market expecting less regulation, lower tax rates, double-digit earnings growth, and additional rate cuts by the Federal Reserve in 2025. Still, it registers that, at 22.3x forward twelve-month earnings, the S&P 500 is trading at a 23% premium to its 10-year average, according to FactSet data.
Looked at another way, the market has already priced in a lot of good news. All that good news must now transfer from the expected to the reality to keep things positively charged.
The November Consumer Price Index put a positive charge in the equity futures market, which had been trading in a lackluster manner ahead of its release at 8:30 a.m. ET.
Currently, the S&P 500 futures are up 25 points and are trading 0.5% above fair value, the Nasdaq 100 futures are up 122 points and are trading 0.6% above fair value, and the Dow Jones Industrial Average futures are up 101 points and are trading 0.3% above fair value.
Total CPI was up 0.3% month-over-month in November, as expected, leaving the year-over-year rate up 2.7%, versus 2.6% in October. Core CPI, which excludes food and energy, was up 0.3% month-over month, as expected, leaving the year-over-year rate up 3.3%, unchanged from October.
There are two key takeaways from the report that might help explain the positive reaction to the otherwise concerning headline numbers.
The first is that the report wasn't worse than feared. It was right in-line with expectations; therefore, it did not upset the market's view that the Fed will cut rates another 25-basis points at next week's FOMC meeting. The second key takeaway is in the breakdown of the shelter index (+0.3%), which included the smallest increases for owners' equivalent rent (+0.2%) and the index for rent (+0.2%) since April 2021 and July 2021, respectively.
With the lag effect of shelter costs on CPI computations, assumptions are being made that this variable will continue to factor favorably in future CPI reports and help temper future inflation readings.
The Treasury market seemed to like the implications of the report, notwithstanding the high headline numbers for November. The 2-yr note yield went from 4.18% in front of the report to 4.12% after its release. The 10-yr note yield went from 4.25% to 4.22%.
Separately, the fed funds futures market had been pricing in an 86% probability of a 25-basis points rate cut at next week's meeting, but that jumped to 96.4% after the report, according to the CME FedWatch Tool.
The major indices are poised to jump when the opening bell rings. How high they jump today, though, may just depend on whether the Treasury market can keep its inflation worries (and yields) in check and whether the lull in the stock market's price action can maintain the positive charge it has been lacking this week.
