CPI set to influence the Fed’s 2023 plans for inflation

CPI: Consumer inflation is anticipated to have fallen in December compared to November after a problematic 2022 driven by inflation and high costs.

The sudden drop in energy and fuel costs brought on the decline.

However, the yearly rate would likely remain high.

According to Dow Jones, analysts anticipate a monthly decline in the consumer price index of 0.1%.

In the meantime, a 6.5% increase in inflation is presumed.

Despite the reports, the CPI remained below its all-time high of 9.1% in June 2022.

CPI vs Core CPI

The consumer price index measures the average yearly change in prices of consumer goods and services.

Costs associated with food and energy are removed from the core CPI because they alter more frequently than other products.

This limitation is crucial because it may take time to determine the underlying price trend when food and energy expenses vary significantly from month to month or year to year.

Since it is less impacted by short-term changes in food and energy costs, the core CPI is seen as a more reliable inflation index.

It is anticipated to increase by 0.3% in December, reflecting a 5.7% annual growth.

The core CPI increased by 6% annually and 0.2% monthly in November.

Diane Swonk, the chief economist at KPMG, praised the projected drop.

“We welcome it with open arms. It’s good news,” said Swonk.

“It’s great and it helped to fuel consumer spending in the fourth quarter. But it’s still not enough.”

Slowed inflation outlook

The CPI will be released on Thursday, the last batch of data, before the Federal Reserve decides on interest rates on February 1.

The relevance of the inflation rate on the financial markets has increased lately.

Traders predict the CPI to reflect less inflation than analysts expect.

They cited the weaker-than-expected wage increase in the December employment report and other data points that signaled lower inflation expectations.

Stocks rose before the results were made public on Wednesday, which worried Peter Boockvar, the chief investment officer at Bleakley Financial Group.

“The market is looking at it as glass half full. Inflation is rolling over, and the Fed is almost done raising interest rates,” he said.

“I think they remember the last two months when you had numbers that were well below expectations. They’re just assuming that’s going to be the case again.”

Read also: The Fed needs freedom to make hard decisions

The Fed impact

Traders continue to wager on the central bank raising interest rates by a quarter point at its upcoming meeting in the futures market.

Policymakers are expected to raise the fed funds target rate by 0.5 percentage points, according to economists.

20% of the market anticipates a hike of 50 basis points.

State Street Global Advisors’ head economist, Simona Mocuta, saw commotion surrounding a particular data point.

“It’s amazing how much reaction and over a single data point,” she mused. “Clearly, the CPI is very important.”

“In this particular case, it does have fairly direct implications, which are about the size of the next Fed rate hike.”

According to Mocuta, the Fed may be swayed by a lower CPI.

“The market has not priced the full 50. I think the market is right in this case,” she explained.

“The Fed can still contradict the market, but what the market is pricing is the right decision.”

According to Luke Tilley, chief economist at Wilmington Trust, the decline in energy costs and the 12% decline in gasoline prices in December reduced inflation.

The CPI has not reflected a deceased pace, even though the rental market suggests a drop.

“Shelter is the main focus because of the lag,” said Tilley. “Everyone is familiar with the lag that it takes for the data to show up in the CPI.”

“We think there could be a sharper slowdown.”

Nearly 40% of the core CPI comprises housing costs, which are anticipated to increase by 0.6% per month.

Luke Tilley claims that landlords have complained that as the housing market gets worse, it is getting harder for them to boost rent.

“We’re pencilling in slower increases in January and February and March on that shorter leg.”

Focus on services

Economic experts have concentrated on growing service inflation in the CPI since goods inflation is likely to continue shrinking because of the stabilized supply chain.

“The headline monthly changes over the last two, three months overstate the improvement,” said Simona Mocuta.

“We’re going to get the same help from gasoline in the next report. I don’t want to see an acceleration in shelter. I want to see some of the discretionary areas show deceleration.”

“I think right now the focus is very much on the services side.”

The market is now concentrating on the Fed’s capacity to control inflation since it may affect how much further interest rates are hiked.

The economic slowdown brought on by the hike might be the discrepancy between a recession and a soft landing.

“The hope is that basically, we are now in a position where you could envision a soft landing,” said Diane Swonk.

“That requires the Fed to not only stop raising rates but ease up sooner, and that doesn’t seem to be where they’re at.”

“The Fed is hedging a different bet than the markets are. This is where nuance is really hard. You’re in this position where you’re improving,” she continued.

“It’s like a patient is getting better, but they’re not out of the hospital yet.”


Inflation is expected to have declined in December, but it may not be enough to stop the Fed

Bank stocks have become a prospect amid recession fears

Bank stocks Experts estimate that major economies will either slow down or fall into a recession.

As a result, investors today are abandoning tradition in 2023, piling into major bank stocks.


Between January and late February, the Stoxx Europe 600 Banks index, consisting of 42 major European banks, climbed by 21%.

It hit a five-year high, outperforming the Euro Stoxx 600, its broader benchmark index.

Meanwhile, the KBW Bank tracks 24 of the leading US banks, and it rose by 4% in 2023, slightly outpacing the broader S&P 500.

Following the lows last fall, the two bank-specific indexes have surged.

The economy

However, the economic picture is less encouraging.

The United States and the European Union’s biggest economies are projected to grow sluggishly compared to last year.

Meanwhile, the UK output is expected to decrease.

According to former Treasury Secretary Larry Summers, a sudden recession at some point is risky for the United States.

However, central banks were forced to raise interest rates following the widespread economic weakness coinciding with high inflation.

Regardless, it has been a bonus for banks, allowing them to make larger returns on loans to households and businesses as savers deposit more money into their savings accounts.

While rate hikes have anchored big banks’ stocks, fund managers and analysts said that great confidence in their ability to endure economic storms after the 2008 global financial crisis has also played a role.

“Banks are, generally speaking, much stronger, more resilient, more capable to [withstand] a recession than in the past,” said Roberto Frazzitta, the global head of banking at Bain & Company.

Interest rate increases

Last year, policymakers launched campaigns against the increasing inflation as interest rates in major economies increased.

The steep hikes followed a period of low borrowing costs that began in 2008.

The financial crisis ruined economics, prompting central banks to slash interest rates lows to incentivize spending and investment.

For more than a decade, central banks barely budged.

Investors don’t typically bet on banks in an environment where lower interest rates typically feed into lower lender returns.

Thomas Matthews, a senior markets economist at Capital Economics, said:

“[The] post-crisis period of very low interest rates was seen as very bad for bank profitability, it squeezed their margins.”

However, the rate hiking cycle from 2022, coupled with a few signs of easing up, changed investors’ calculations.

On Tuesday, Fed Chair Jerome Powell said interest rates would rise higher than anticipated.

Read also: Fitch Ratings warns of downgraded credit ratings

Returning investors

Due to the higher potential shareholders’ returns, investors have been drawn back.

For example, Ciaran Callaghan, the head of European equity research at Amundi, said the average dividend yield for European bank stocks is currently at around 7%.

According to Refinitiv data, S&P 500’s dividend yield currently stands at 2.1% while Euro Stoxx 600 is 3.3%.

Additionally, European bank stocks rose sharply in the past six months.

Thomas Matthews attributed Capital Economics’ outperformance to US peers based on how interest rates in the countries using euros are closer to zero than in the United States, which means investors have more to gain from the increasing rates.

He also noted that it could be due to Europe’s remarkable reversal of fortune.

Wholesale natural gas prices in the region hit a record high last August, but they have since tumbled to levels prior to the Ukraine war.

“Only a few months ago, people were talking about a very deep recession in Europe compared to the US,” said Matthrew.

“As those worries have unwound, European banks have done particularly well.”

Structural changes

Right now, European economies are still weak.

Whenever economic activity slows, bank stocks are challenging targets to hit due to banks’ earnings ties to borrowers’ ability to repay loans and satisfy consumers’ and businesses’ appetite for more credit.

However, unlike in 2008, banks are better positioned to endure loan defaults.

Following the global financial crisis, regulators proactively set up measures, requiring lenders to have a sizable capital cushion against future losses.

Lenders must also have enough cash (or assets that can be quickly converted) to repay depositors and other creditors.

Luc Plouvier, a senior portfolio manager at Dutch wealth management firm Van Lanschot Kempen, noted that banks underwent structural changes in the past decade.

“A lot of the regulation that’s been put in place [has] forced these banks to be more liquid, to have much more [of a] capital buffer, to take less risk,” he noted.

Amazon continues layoffs with 18,000 cuts announced

Amazon: Mass layoffs, also known as large-scale layoffs or workforce reduction, refer to the practice of a company dismissing a significant number of employees at the same time.

This can happen for various reasons, such as a decline in business, restructuring the company, or outsourcing certain functions.

2022 was a year that witnessed several major corporations announce laying off hundreds of thousands of workers.

Although it has already joined the movement, Amazon says it will continue to lay off employees.

The news

Amazon is one of the world’s largest and most successful online retailers.

The company initially started as an online bookstore but quickly diversified to sell various products, including electronics, clothing, home goods, and more.

In addition to its online retail business, Amazon also offers cloud computing and streaming services.

According to reports, Amazon is laying off more than 18,000 employees.

The company explained that the decision was made due to the worsening global economic outlook.


Andy Jassy, the CEO of Amazon, said the e-commerce giant would continue its layoffs early next week.

He released a memo that elaborated on the decision, saying:

“Our annual planning process extends into the new year, which means there will be more role reductions as leaders continue to make adjustments.”

“Those decisions will be shared with impacted employees and organizations early in 2023.”

According to Jassy, Amazon has yet to conclude how many other roles will be affected.

However, each leader will communicate with their respective teams when they come to a conclusion.

Additionally, the memo said executives recently met to decide how to trim the company.

Amazon executives will also prioritize what customers value and the business’s long-term health.

“This year’s review has been more difficult given the uncertain economy and that we’ve hired rapidly over the last several years,” said Jassy.

The layoffs

In November, Andy Jassy said job cuts at Amazon would continue into early 2023.

Several media outlets reported last fall that the e-commerce giant set a goal of cutting over 10,000 employees.

On Wednesday, Amazon started the layoffs.

The decision to cut jobs is supposed to help Amazon pursue long-term opportunities from a more robust cost structure.

Jassy acknowledged that the cuts are a difficult decision and that it is difficult for people.

“We don’t take these decisions lightly or underestimate how much they might affect the lives of those who are impacted,” he added.

The e-commerce giant will start informing the affected staff on January 18.

“It’s not lost on me or any of the leaders who make these decisions that these aren’t just roles we’re eliminating,” said Jassy.

“But rather, people with emotions, ambitions, and responsibilities whose lives will be impacted.”

Read also: Retailers have Grim Expectations with the 2023 Market

Shifting habit

The e-commerce giants enjoyed a booming business at the onset of the pandemic.

Consumers shifted their habits to online shopping for nearly everything they needed.

However, Amazon was struck hard by the surging inflation in 2022.

In addition, consumers demand dwindled as people started opting for in-person shopping, an area the company is currently focusing on.

Company stock

In October, Wall Street analysts were disappointed with Amazon’s holiday season forecast as it missed their expectations.

The company expected revenue for the final three months to stand between $140 and $148 billion, which was significantly lower than the expected $155 billion.

Rising inflation and recessionary fears affected consumer purchasing decisions, leading to a weaker forecast.

Amazon reported revenue of $127.1 billion for the third quarter.

While it was a 15% increase from 2021, it missed Wall Street estimates.

Other companies

Several tech companies, founders, and CEOs admitted failing to gauge pandemic demand.

As a result, many are cutting off staff.

Meta recently announced it was laying off 11,000 employees, the largest mass layoff in the company’s history.

Meanwhile, after buying Twitter for $44 billion, Elon Musk has been cutting jobs from the company left and right.

This week, Salesforce announced it was cutting off 10% of its employees.


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