The Week Behind 

In my view, last week’s major economic developments – Powell’s speech, PCE, November Payrolls – were balanced. They each had a little something for the bulls and a little something for bears. Despite the neutrality, markets across asset classes – currencies, bonds, equities – reacted to each with a bullish bias. Endorsed by retreats in the USD (currency) and treasury yields (bonds), the majors (stocks) put together a positive week. The NASDAQ outperformed, gaining 2.09%. The S&P followed, adding 1.13%. The DOW, though up ~0.25%, underperformed. 

Highlights

• During his speech at Brookings, Powell reiterated that smaller-increases are likely, but the destination of Fed Funds remains unknown.
• Headline PCE printed 6%, the lowest of the year. Core PCE equaled the 5% forecast, a MoM decrease.
• Nonfarm Payrolls for November came in at 263k, handily beating the 200k forecast. However, the prior month’s number was 284k, and unemployment remained unchanged MoM at 3.7%.

A Bullish Tint to Balanced Reports

The three big macro events this week, in chronological order, were Powell’s speech at Brookings, PCE, and Payrolls. In the aftermath of each, the USD lost strength, yields declined, and stocks gained. In my opinion, these reports did not reveal anything that should have moved prices, especially given our proximity to the highs. In fact, to showcase how balanced these developments were, I’ll bold the bullish and italicize the bearish for each. 

Powell’s speech felt like a reiteration of the FOMC Minutes. Expect smaller-hikes in the future, but inflation has yet to be defeated. Until more progress is made, we are not going to know for certain how high the terminal rate is.

Both Headline and Core PCE came in cooler-than-expected, but 6% Headline and 5% Core are still unacceptably high, which means the Fed is far from victory.

November Payrolls came in way above consensus, adding 263,000 jobs, which provides the Fed cover to double down on hawkish rhetoric and policy. However, unemployment, the metric the Fed is focusing on to gauge policy, remained stagnant at 3.7%, suggesting the Fed does not need to adjust its current stance.

Given the current bullish-tilt, I expect the overall strength to remain in-tact until Friday’s PPI report, which will provide fresh tea leaves for next week’s CPI and FOMC meeting.

The Week Ahead  

While there are meaningful economic reports releasing each day this week, I expect the market to emphasize two: OPEC+ Meeting and PPI.

Yesterday, OPEC+ met to discuss potential adjustments to oil production. If not already released, news from that meeting should hit the wire today. Despite the imminent EU/NATO price-cap on Russian crude, continued uncertainty regarding the Chinese economy, and global growth concerns, the expectation is no change. I think oil is priced for that outcome. Concisely, a production cut would boost the price of oil, thus be inflationary. A production increase would have the opposite effect. That being said, I cannot foresee a scenario where OPEC+ increases production. Furthermore, I believe government policies manipulating the price of oil downward will fail, or cease, in the short-to-intermediate term. These factors make oil equities interesting from now until 23Q1. 

PPI releases ahead of the open on Friday. As a leading indicator for CPI, PPI has predictive value for CPI. Over the past several months, CPI was released first. This time, market analysts will have the benefit of PPI to better predict CPI. In other words, PPI is a CPI preview, which makes this month’s PPI more important than months prior. I expect hedge funds to use this data to make some bets on CPI, which could meaningfully move price. Prior month’s PPI was 8.0%, continuing a downward streak started in June. Consensus is 7.2%. Given elevated index stock prices, a number above 8% likely means a return of the Friday sell-off. If we get a number below or at expectations, I expect the market to rally, but for reasons I will present below, I think this outcome is least likely. Overall, as long as PPI comes in below the prior month’s 8.0%, which suggests CPI will also decrease, I think markets will behave: trade up or down ~1-2%. I think this is the most likely outcome. 

PPI: A High-Bar Setup

Last month, expectations for CPI were low. Core CPI only needed to come down 0.1% to meet the forecast. This month, analysts want a 0.8% decrease in PPI. Clearly, the bar is much higher. While CPI is different from PPI, I think PPI will be treated like a pre-release for CPI because PPI has predictive value and will be released first. Although there have been PPIs (see chart below) featuring a 1% or more decline, over the last two months, PPI has only decreased between 0.3% and 0.4%. Since the big drop in June, the decreases in PPI have begun to plateau. A 0.8% decrease would represent a re-deceleration. I have yet to see any data suggesting a re-deceleration is underway. For the most part, economic reports feel balanced. Consequently, I expect more of the same for PPI in the way of another MoM decrease, but I do not think it will fall far enough to meet or beat the 7.2% forecast.