Fed’s Harker sees smaller interest rate hikes ahead
Philadelphia Federal Reserve President Patrick Harker said he thinks the central bank can ease back further on interest rate increases.
“I expect that 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. In my view, hikes of 25 basis points will be appropriate going forward,” the central bank official said in a speech Thursday morning.
“At some point this year, I expect that the policy rate will be restrictive enough that we will hold rates in place to let monetary policy do its work,” he added.
A basis point is 0.01 percentage point.
The comments came prior to a Labor Department report showing that the consumer price index declined 0.1% in December, adding to some positive inflation readings late.
Harker is a voting member this year on the rate-setting Federal Open Market Committee.
Stocks continue moving at market open
The three major indexes jumped around in the first minutes of trading Thursday as investors continued digesting the CPI data.
At 9:35 a.m., the Dow was down 0.1%. The S&P 500 also shed 0.1%, while the Nasdaq lost 0.2%.
All three indexes opened up at 9:30 a.m.
— Alex Harring
Shelter, apparel were two hot inflation areas
While headline and core CPI readings for December showed monthly moves of -0.1% and 0.3%, respectively, there was a wide divergence among some of the internal components.
Here’s a look at the month-over-month changes in key categories:
- Food: +0.3%
- Energy: -4.5%
- New vehicles: -0.1%
- Used cars and trucks: -2.5%
- Apparel: +0.5%
- Shelter: +0.8%
- Medical care services: +0.1%
Shelter inflation is a key area of debate, as investors and analysts who think the Fed is being too aggressive argue that shelter data is outdated.
See how the major futures indexes responded to the newest inflation data
The major futures indexes whipsawed as investors responded to December’s CPI data, which came in in line with economist expectations. See how each of the three futures indexes moved in the 30 minutes leading up to and following the release of the data at 8:30 a.m. ET:
Fed will be unphazed by CPI report
The slight decline in consumer prices in December will not change the path for the Federal Reserve, as it meets to raise rates Jan. 31 and Feb. 1.
CPI fell by 0.01%, as expected by economists, and was up 6.5% from a year ago. Core CPI rose 0.03%, also as expected.
“The Fed has made clear even as markets push back on the Goldilocks scenario in the employment report, the Fed was doubling down on their pledge to derail inflation because they see this as a marathon not a sprint,” said Diane Swonk, chief economist KPMG.
Stock futures were higher after the report while Treasury yields fell. Yields move opposite price.
“It was exactly in line. They ran up the S&P 500 by 50 points yesterday with everyone hoping for a weak number. It was as expected. It doesn’t change anything,” said Peter Boockvar, chief investment officer at Bleakley Financial. “They are almost done raising rates. Higher for longer is what people should be focused on.”
Swonk and other economists expect the Fed to raise rates by a half percentage point on Feb. 1. The futures market, however, has been pricing in a quarter point hike.
Consumer price index for December matches expectations
The consumer price index fell 0.1% in December, matching a Dow Jones estimate. That was the biggest monthly decline since April 2020. The so-called core CPI, which strips out volatile food and energy prices, also met expectations with a 0.3%. gain.
On a year-over-year basis, the index rose 6.5%, still well above the Fed’s 2% inflation target.
— Fred Imbert
Disney, American Airlines among stocks making the biggest moves premarket
Bed Bath & Beyond could see a short-squeeze, S3 Partners says
The big move in Bed Bath & Beyond on Wednesday may not have been a short-squeeze yet, but that could come soon, according to Ihor Dusaniwsky of S3 Partners.
The stock spiked more than 68% to $3.49 per share on Wednesday. It has continued to climb higher in extended trading, pushing above $4 per share.
“We could see some near-term short sellers exit their positions and begin to pocket (realize) the profits they earned in 2022,” Dusaniwsky said.
Bed Bath & Beyond was threatening to move higher again on Thursday.
Bed Bath & Beyond has short interest of about 52%, according to S3. While those who began this trade in the last month may be sitting on losses, the stock did trade as high as $30 per share in August — meaning others may be comfortably able to ride out a process that may end in bankruptcy.
“The crucial difference between BBBY and other crowded shorts is that there is a definite threat of bankruptcy, which could embolden shorts to hold onto their positions, incur some temporary losses, and wait out this rally in anticipation of a $0.00 stock price in bankruptcy,” Dusaniwsky said.
— Jesse Pound
Netflix rises after Jefferies upgrade
“We’re upgrading Netflix to buy based our belief that a well-executed strategy of launching [advertising-based video on demand] with password sharing changes will drive revenue and adjusted EBTIDA well above Street estimates, resulting in margin upside and valuation expanding back towards historical averages,” Jefferies said.
American Airlines raises guidance, shares gain
American Airlines shares rose 3% in the premarket after the airline hiked its fourth-quarter earnings guidance. The company now expects earnings for the quarter to come in between $1.12 and $1.17 per share, up from a previous range of 50 cents to 70 cents.
— Fred Imbert
Morgan Stanley upgrades Cleveland-Cliffs
Cleveland-Cliffs shares rose more than 2% in the premarket after Morgan Stanley upgraded the steel producer to overweight from equal-weight, citing a boost from higher fixed annual steel price contracts.
“We believe the recently announced increase in fixed annual steel price contracts (see here) should allow CLF to cope with lower forecast spot steel prices and generate robust FCF yields in the coming years as the company has no major planned capital expenditures,” analyst Carlos De Alba wrote in a note.
— Carmen Reinicke
European markets nudge higher
Disney up 1.5% after naming Nike’s Mark Parker chairman
Disney also said that it is opposing activist investor Nelson Peltz’s attempt to join the board. Nearly two months ago, Peltz’s Trian Fund Management took an approximately $800 million stake in the company and began seeking a board seat.
— Yun Li
Too early to celebrate falling inflation?
It might be too soon to cheer the the early signs of inflation easing as services inflation could keep price pressures elevated, according Andrew Patterson, Vanguard’s senior economist.
“The main upside risk to core inflation comes from the ex-shelter services components,” Patterson said in a note. “Persistent wage growth could keep services inflation running hot in 2023. Recent slowing in wages while welcome, does not yet suggest a broader slowing of labor market.”
While goods deflation is a welcome sign, we would still need two more ingredients to call peak inflation —a slowing labor market and persistently cooling shelter inflation, Patterson said.
— Yun Li