The market wants to celebrate the slowing CPI, but the Fed could ruin the party

Stocks continue to rise as market players await the CPI report at 8:30am ET. The S&P 500 rose 1.4% on Monday and remained above the key support above 3900.

Last month, the S&P 500 rose about 5.5% on a lower-than-expected CPI report, but the circumstances are very different this time around. The market celebrated the idea of ​​”peak inflation” last month, but the S&P 500 is now around the same end-of-day level in the latest CPI report.

Over the past month, the market narrative has shifted away from consumer inflation concerns. It was more concerned about strong employment and the potential for a recession as higher interest rates take their toll.

A 0.5% rate hike at Wednesday’s Fed meeting had been expected since the last CPI report, and the market even experienced a short-lived rebound when Chairman Jerome Powell hinted that it was very likely.

If CPI is again lighter than expected, can market players expect the same kind of euphoric reaction as on November 10? Probably not. Soft CPI is already expected to a high degree, and that is reflected in the 0.5% rate increase that is due to take place on Wednesday. The main economic issue remains the closing rate — how high will rates rise in the coming months? Powell and the Fed are focused on labor costs more than anything right now, and CPI isn’t going to change that.

One of the challenges traders face is that even if the market celebrates a soft CPI report on Tuesday, they will have to immediately confront the Fed policy meeting on Wednesday. It is highly unlikely that Powell is going to suggest that the battle against inflation has been won. The Fed is going to remind the market that it has a lot of work to do and that a soft CPI report won’t do much to change what it has to do in the months ahead.

The primary market narrative is shifting to concerns about a recession early next year. The fact that interest rates have fallen has more to do with fears of an economic slowdown than with celebrations of lower inflation.

We have a very difficult trading environment. A soft CPI report will excite some market players, but then we have to worry about the Fed ruining the party. If you want to navigate this market effectively, stay fast and flexible.

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