[New York Stock Market] Rise on 'Expected' CPI Ahead of FOMC... Oil Prices Down 3.8%

The three major indices of the U.S. New York stock market all closed higher on the 12th (local time), a day before the announcement of the final Federal Open Market Committee (FOMC) results of the year, as they digested the consumer price index (CPI) that met expectations.

At the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 36,577.94, up 173.01 points (0.48%) from the previous session. The S&P 500, which focuses on large-cap stocks, rose 21.26 points (0.46%) to 4,643.70, and the tech-heavy Nasdaq index closed at 14,533.40, up 100.91 points (0.70%).

Among the S&P 500 sectors, all eight sectors except energy, real estate, and utilities rose. The decline in international oil prices highlighted the weakness in energy-related stocks. Oracle fell more than 12% from the previous close after quarterly earnings missed expectations. Macy's stock, which surged the previous day on acquisition rumors, dropped more than 8% after Citigroup downgraded its investment rating. Alphabet, Google's parent company, closed slightly lower after losing an antitrust lawsuit related to the App Store filed by Epic Games. Lucid Group fell more than 8% following the resignation of its Chief Financial Officer (CFO). On the other hand, big tech stocks generally showed gains. Nvidia rose 2.21%, Amazon increased 1.09%, and Microsoft, Apple, and Netflix closed slightly higher.

[Image source=Reuters Yonhap News]

Investors are closely watching economic indicators such as the CPI released on this day and the resulting movements in Treasury yields ahead of the December FOMC results to be announced the next afternoon. According to the U.S. Department of Labor, the November CPI rose 3.1% year-over-year, in line with expert expectations. This was lower than the previous month's increase of 3.2%, continuing the trend of slowing inflation. The October CPI rose 0.1% month-over-month, exceeding the forecast of 0.0%. The core CPI, which excludes volatile energy and food prices, increased 4.0% year-over-year and 0.3% month-over-month, both matching market expectations.

Overall, the CPI report met forecasts, but a closer look revealed inflation concerns. In particular, the so-called ‘supercore’ inflation, which excludes housing costs from the core CPI, showed no signs of easing, which was seen as a negative factor. According to Bloomberg News, the November supercore CPI rose 3.93% year-over-year and 0.44% month-over-month. However, since the headline figure met expectations, the market impact was limited, as the market had largely priced in a December rate hold. Adam Crisafulli, founder of Vital Knowledge, commented, "Both bulls and bears had differing views on the November CPI, but the fact is that the CPI increase matched expectations." Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, said, "There are no details that would immediately impact the Fed's thinking."

The December FOMC results, which began on this day and will continue for two days, will be released at 2 p.m. on the 13th. The market expects the Fed to hold rates steady at the current 5.25?5.50%. The key points will be the dot plot containing officials' rate projections and Chairman Powell's press conference. Lyngen noted, "(The supercore figure in the CPI report) reinforces the need for a hawkish hold," and he expects the 2024 dot plot will not fully reflect the market's rate cut expectations. Chairman Powell is also expected to emphasize in the subsequent press conference that the fight against inflation is not over, aiming to temper market expectations for rate cuts.

According to the CME's FedWatch tool, federal funds futures currently price in over a 98% chance that the Fed will hold rates steady at this month's meeting. The probability of a hold in January next year exceeds 94%. The chances of the Fed cutting rates by at least 0.25 percentage points in March or May next year exceed 41% and 74%, respectively.

A survey released by economic media CNBC on this day showed that 69% of respondents expect the Fed to begin cutting rates in June next year. This is not as soon as the market anticipates. If the Fed were to pivot to rate cuts too quickly, there is a risk of inflation rebounding as it did in the late 1960s to early 1970s. Therefore, Chairman Powell is expected to maintain a tighter policy longer than expected.

However, voices supporting a rate cut in March next year are also present. Anna Wong, an economist at Bloomberg Economics, said, "The Fed has made significant progress in disinflation over the past six months. There are also signs that deflation in China is further easing inflation. Short-term inflation expectations have also dropped sharply," and she predicted, "The Fed will start cutting rates in March next year."

U.S. Treasury Secretary Janet Yellen attended the Wall Street Journal (WSJ) CEO Council Summit on this day and diagnosed that the U.S. economy is heading toward a so-called ‘soft landing,’ where inflation decreases without a severe economic slowdown. She said, "In my view, a soft landing means the economy continues to grow, the labor market remains strong, and inflation decreases," adding, "That's the path we're on." Regarding concerns that the final stage (the last mile) of achieving the 2% inflation target might be difficult, she said, "Personally, I don't see any particular reason why the last mile would be especially challenging."

This week, in addition to the Fed, monetary policy meetings will be held by the European Central Bank (ECB) and the Bank of England (BOE). The ECB, expected to hold rates steady, will also release an updated economic outlook. Additionally, Brazil, Norway, Mexico, Taiwan, the Philippines, and Russia will also decide on their interest rates.

In the New York bond market on this day, long-term Treasury yields fell due to strong demand in the 30-year bond auction. The benchmark 10-year U.S. Treasury yield dropped to around 4.20%. The 2-year yield, sensitive to monetary policy, rose slightly to about 4.73%. The dollar index, which measures the value of the U.S. dollar against six major currencies, fell more than 0.2% to around 103.8. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street's fear gauge, moved around 12, down more than 4% from the previous session.

Oil prices fell due to supply and demand concerns ahead of the FOMC results. On the New York Mercantile Exchange, January delivery West Texas Intermediate (WTI) crude oil closed at $68.61 per barrel, down $2.71 (3.80%) from the previous session. This closing price was the lowest since June 27.