For nearly three years, the US monthly consumer price report has been a key federal data point closely watched by stock traders. As investors await Thursday's November inflation report, most exhibit indifference rather than the usual anxiety.
According to Barclays data, options traders are betting the S&P 500 will move just 0.7% in either direction - significantly below the 1% average actual volatility triggered by the past 12 reports through September.
The shift in sentiment has solid justification. The Federal Reserve currently shows greater sensitivity to labor market weakness than minor inflation fluctuations. Tuesday's sluggish jobs data kept the door open for 2024 rate cuts. The delayed November report (originally scheduled for December 10) also contains more "stale" data with potentially reduced reliability due to survey disruptions from the government shutdown. October's CPI report won't be released.
"Markets are operating under the assumption this report is either 'much ado about nothing' or questionable enough in data collection to be ignored," said Alexander Altmann, Barclays' global head of equity tactical strategy.
The Bureau of Labor Statistics confirms this CPI report can only provide partial inflation insights without October data for proper monthly comparisons of headline and core indices. It's unlikely to alter the Fed's January policy meeting outcome, where rates are expected to hold pending more reliable economic data. The Fed just delivered its third consecutive 25-basis-point cut last week.
"The probable outcomes have very limited equity market impact," said Greg Boutle, BNP Paribas' head of US equity and derivatives strategy. "The bar for CPI to matter is extremely high - we'd need dramatically off-consensus extreme prints."
This largely reflects the Fed's heightened focus on employment downside risks, now at least equal to CPI scrutiny. November's weak job growth and four-year high unemployment confirmed continued labor market cooling after October's softness.
Not all Fed officials prioritize the labor market aspect of the dual mandate. Two dissented from last week's cut, citing tariff-related inflation concerns. Atlanta Fed President Bostic reiterated policymakers should remain inflation-focused, expecting elevated price pressures through most of 2024.
Investors last saw complete CPI data in late October showing 3% headline inflation - slightly above Fed target but matching expectations. Similar November figures are anticipated.
"We're not expecting anything out of the ordinary," said Chris Zacarelli, Northlight Asset Management CIO, noting consensus expects another ~3% annual increase. "A 3.5% print could catch traders off guard." Conversely, substantially better data (2.7% or below) would deliver positive surprises.
CPI's declining significance also stems from Chair Powell's term ending next May. His successor is expected to aggressively support deep cuts aligning with Trump's unconventional demands, regardless of data.
"Every inflation report mattered this year, but their importance has diminished as we approach the Trump-appointed Fed chair transition," said Jason Coogan, index options trader at Simplex Trading.
Seasonal factors may further dampen Thursday's data impact as stocks enter traditionally bullish periods. "These positions suggest expectations for markets to rally to new highs," Coogan observed. The S&P 500 closed Tuesday 1.5% below its record after a three-day decline.
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