CPI Report and Market Impact
Stock Market Performance on CPI Report and Fed Decision Days
Inflation Metrics and Market Sentiment
Overview
Wall Street is preparing for a significant day of economic events on Wednesday, with the May Consumer Price Index (CPI) release in the morning followed by the Federal Reserve’s policy announcement in the afternoon. Historically, CPI report days and Fed decision days have individually been associated with market volatility, but their coincidence is rare. According to Dow Jones Market Data, these events have fallen on the same day only 13 times since 2008.
Historical Performance
Despite the small sample size, historical data indicates that the major stock indexes generally post gains on such days:
- S&P 500: Average gain of 0.7%
- Dow Jones Industrial Average: Average gain of 0.9%
- Nasdaq Composite: Average gain of over 1%
Volatility Expectations
Dave Sekera, chief U.S. market strategist at Morningstar Research Services, suggests that volatility may not be greater than usual unless Fed Chair Jerome Powell makes unexpected comments during his press conference. Historically, Powell’s measured commentary has minimized unexpected market reactions.
Inflation Metrics and Market Sentiment
If the inflation metrics align with or are better than expectations, this could bolster positive market sentiment. However, Sekera cautions that given the current high market valuations, there may be limited short-term upside for U.S. equities. Conversely, higher-than-expected inflation metrics could trigger a market selloff, contingent on the degree to which inflation exceeds consensus expectations.
CPI Report and Market Impact
The CPI, which measures the cost of goods and services paid by Americans, is forecasted to rise by only 0.1% in May. This would be the smallest increase in seven months and the second consecutive month of slowing inflation. The core rate of inflation, excluding food and energy prices, is expected to climb 0.3% for the second month in a row.
Market Reactions to CPI Days in 2023
- S&P 500 and Dow Industrial Average: Averaged small declines of 0.02% and 0.18%, respectively, on the past five CPI days this year.
- 10-Year Averages: Show a 0.02% gain for the S&P 500 and a 0.06% decline for the Dow on CPI days.
Volatility Trends
CPI day volatility was notably high in 2022 as hot inflation numbers initiated the Fed’s rate-hike cycle. The S&P 500 saw an average percentage move (up or down) of 1.9% on CPI release days in 2022, with a median move of 1.7%. While CPI day volatility moderated in 2023, it remained significant.
Fed Decision Day Performance
Stock-market performance on Fed policy decision days in 2023 has been mixed:
- S&P 500: Averaged a 0.1% gain on three Fed decision days this year.
- Dow and Nasdaq: Each averaged declines of around 0.4%.
On March 20, the major indexes advanced over 1% after the Fed reiterated the prospect of three rate cuts in 2024.
Current Market Status
As of early Tuesday afternoon, U.S. stocks were trading mixed:
- Dow Industrial Average: Down over 250 points (0.7%)
- S&P 500: Down 0.3%
- Nasdaq: Up 0.1%, led by a 6% surge in Apple Inc. shares.
Conclusion
The coincidence of CPI and Fed decision days is uncommon but generally leads to gains in the major stock indexes. However, the actual impact on market volatility will depend on the specifics of the inflation data and the Federal Reserve’s policy signals. Investors should brace for potential short-term fluctuations while keeping an eye on the broader economic trends that these key indicators will reveal.