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The S&P 500 futures are moving higher after the much-anticipated CPI report came in line with analyst expectations. Judging by the market reaction following the neutral CPI print, it is clear that investors are betting that the Federal Reserve will adopt a less aggressive approach and tone at its next policy meeting on February 01.
The December CPI report yielded a 0.1% dip in prices from November but still showed a year-over-year increase of 6.5%. Excluding food and energy, inflation showed a month-over-month gain of 0.3% and 5.7% YoY.
The S&P 500 initially fell before racing higher to touch the 4000 handle for the first time in 4 weeks. The rally has cooled in the meantime as the S&P 500 futures trade at around 3982, about 0.2% up on the day, as of 09:25 EST (14:25 GMT).
The futures were also boosted by comments by Fed Patrick Harker, who serves as the President of the Federal Reserve Bank of Philadelphia. While noting that the Fed is likely to raise rates “a few more times” this year, he also believes that it’s time to shift to smaller, 25bps rate hikes.
“We will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed…hikes of 25 bps will be appropriate going forward,” Harker said.
Following his comments, the Fed swaps now seem to favor a 25bp February rate increase. The Fed-dated OIS is pricing in around 28bp of rate-hike premium, down from 33bp at Wednesday’s close. This has pushed bond yields lower while underpinning stocks.
“Stocks are likely to continue grinding higher, albeit w/a ceiling for the SPX still at ~4100. We don’t think the CPI changes much for the Fed (although watch for Fed officials today to try and undermine the equity enthusiasm),” Vital Knowledge analysts wrote in a note to clients following the CPI data release.
“The real debate isn’t the ceiling height but instead the ceiling length (the market is pricing in 2+ 25bp cuts in H2, something the Fed doesn’t agree with),” they added.
