Market Perspective for December 11, 2022

Higher than expected producer price inflation capped off a down week for stocks.

Wall Street slid lower on Monday and Tuesday before trying a rebound mid-week, only to be hit with higher-than-expected producer price inflation. The Dow Jones Industrial Average slipped 2.77 percent, the S&P 500 Index 3.37 percent, the Nasdaq 3.99 percent and the Russell 2000 Index 5.08 percent.

Oil prices appeared set for weekly losses on recessionary concerns. Crude oil fell to $71.02 per barrel, a new 52-week low. Diesel remains elevated in price, but it too has been on a losing streak. It fell to $2.78 per gallon in the futures market, down 30 percent in a little more than one month.

Energy was the worst performing sector last week, losing more than 8 percent. Communication services and consumer discretionary each fell more than 4 percent. Utilities were the best performing sector, but still slipped 0.30 percent in an overall down week for the market.

Despite falling oil prices, producer prices climbed 0.3 percent in November. Fresh fruits and vegetables, along with rising fees at financial firms, pushed the index up more than expected. Although some analysts dismissed the reading because of what caused the higher prices, inflation is never balanced.

Next week will bring the consumer price index for November. The market consensus sees 0.4 percent headline inflation for the month and 0.3 percent core inflation. As long as core inflation meets the consensus or comes in lower, stocks should hold up well. If like the PPI, core CPI comes in hotter than forecast, selling could push the indexes lower.

Investors may hold off on taking too much action in response to the CPI though, because the Fed will disclose its plans for interest rates on Wednesday. Officials from the central bank have hinted at another 0.5 percentage point increase and futures markets have priced that hike in. Any deviation from that plan will spark volatile bullish or bearish reaction, depending on if it comes in dovish or hawkish. Chairman Powell’s press conference, along with the “dot plots” showing Federal Open Market Committee members’ expectations for the economy and rates in 2023, could also spark a market reaction. Currently, speculators and interest rates futures forecast rates will rise into September 2023, with the market split about 50/50 on whether 5 percent or 5.25 percent will be the highest rate before the Federal Reserve starts cutting.

The weekly number of U.S. jobless claims rose to 230,000 last week, up from 226,000 the previous week, the Bureau of Labor Statistics (BLS) reported Thursday. The labor market remains strong, but the four-week moving average of initial claims has been rising.

China shifted its coronavirus policy in the wake of protests. It has abandoned zero-covid and now says most of the population will be infected. Serious outbreaks will still be met with lockdowns, as will places where there are more elderly residents. It remains to be seen how quickly the country opens up though because two years of intense virus propaganda has altered consumer behavior. November trade data showed Chinese trade was weaker than forecast. Tuesday and Wednesday will see Chinese lending, industrial production and retail sales data.

iShares China Large Cap (FXI) has rallied about 33 percent over the past six weeks and lifted emerging market funds with it. The rally has also helped global equities as investors hope for faster growth from China. If the U.S. inflation data and Fed meetings are in line with expectations, its possible the Chinese data be more impactful on markets this week.

Earnings for the upcoming week:
• Monday: Oracle Corp
• Thursday: Adobe Inc.: Q4 2022 Earnings
• Friday: Accenture plc: Q1 2023 Earnings

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