S&P 500 pushes higher, eyes 4700 again amid “relief” that high US inflation wasn’t even higher

US equities gained across the board amid relief that the November US Consumer Price Inflation (CPI) report didn’t again surprise on the upside. The S&P 500 gained 0.5% to recover from Thursday’s 4667.40 close to around 4690. The Nasdaq 100 was up 0.7% and the Dow was up 0.25%. The VIX fell a further more than 2.0 points to under 19.50.

For reference, headline CPI came in at 6.8%, in line with expectations. Some had been expecting an upside surprise following remarks from US President Joe Biden who seemed to pre-emptively playdown inflation fears, which market participants took as an indication that Friday’s number would be higher than expectations. Note that Biden gets to see the important data releases one day early. Still, the headline rate of inflation was at its highest in nearly four decades.

According to JPM’s Jai Malhi, “today's rise in US inflation was broadly expected but it does confirm that price pressures continue to build but also broaden out”. “This release,” he continued, “won't deter (the Fed) from speeding up the (taper) process, allowing the central bank to raise rates earlier next year if required.” A recent poll conducted by Reuters showed the median expectation of poll participants was for the Fed to start hiking rates in Q3 2022, followed by a second hike in Q4. Most said the risk was that hikes would come earlier, rather than later.

Given a recent shift in Fed language that some analysts have pointed out, betting on a first hike in Q3 might be overly dovish. Rather than continuing to emphasise that raising interest rates too early was a threat to the labour market recovery in the US, the Fed has pivoted to calling inflation a threat to the recovery in the US.

By many metrics, claims some analysts, the US labour market is already pretty much back to full employment – just this week, weekly initial jobless claims fell to their lowest since 1969 at 184K and JOTLs data showed the number of job openings in October moved back above 11M again. The Fed may now see containing inflation as a way to protect recent labour market progress. If the Fed does surprise in 2022, this might make things difficult for growth/duration-sensitive stocks (like big tech) as yields are pushed higher.