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Profit from the Pros By Kevin Matras Executive Vice President
Stocks Up Ahead Of This Morning's Inflation Report
Stocks closed higher yesterday with the Nasdaq and S&P leading the way with gains of 1.13% and 0.75% respectively.
Yesterday's Weekly Jobless Claims report rose by 4,000 to 230,000 vs. last week's 226K and views for 228K.
But all eyes will be on this morning's Producer Price Index (PPI) report. Last month's report showed October's headline inflation at 8.0% y/y vs. the previous month's 8.5%, while core inflation (ex-food & energy) was up 6.7% vs. the previous month's 7.2%. This month's report is expected to show November's headline inflation up 0.2% m/m and 7.2% y/y, while core inflation is expected to be up 0.2% m/m and 5.9% y/y.
If so, that would show another meaningful inflation moderation, and should be interpreted bullishly, further underscoring the belief that the Fed will only raise by 50 basis points at next week's FOMC meeting, and maybe not have to raise as much as previously thought in 2023. We shall see. That report comes out at 8:30 AM ET.
We'll also get the Wholesale Inventories (preliminary) report, and Consumer Sentiment report this morning.
As mentioned yesterday, renewed talk of recession seems awfully premature, given that we just came out of a recession, with Q3 GDP up 2.9% and Q4 estimated to come in at 3.4%.
And quite frankly, the slightly rising jobless claims, and the other slightly softening economic reports we have gotten, or may get down the road, are positives. If upcoming economic reports show sharp declines, then the fear of a recession will suddenly become justified. But until then, a gradual softening will be looked at as good news. Because the Fed is trying to slow down inflation by slowing down the economy. And as evidence shows it's working, that means the Fed will not have to overly elongate the tightening cycle to make that happen.
Also mentioned yesterday, reports that China continues to loosen their Covid restrictions has been supportive for the market. Not only will that add to China's economic output (and global growth), it will also help ease supply chain disruptions. China's equity markets have been on the move lately. And really for the last month and a half.
U.S. stocks are on pace to end lower for the week, after two strong up weeks in a row. A better than expected inflation report this morning could possibly change that.
Nonetheless, stocks have been on a tear ever since putting in their key upside reversal on October 13.
And regardless of how this week ends, the seasonal tendencies remain favorable as Q4 is typically the best quarter for stocks. And the post-midterm effect on the market is positive as well (since 1950, stocks have always gone up in the year after midterms, with an average 12-month forward return of 18.6%).
So we are still at the beginning for one of the best times for stocks.
Executive Vice President, Zacks Investment Research
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