The Final Rate Hike

Following yesterday’s Producer Price Index (PPI) for November, the other shoe dropped this morning with the Consumer Price Index (CPI), which performed similarly to its PPI counterpart: +0.4% met analysts’ consensus, whereas the “core” read (ex-food & energy, which strips out near-term pricing volatility) reached +0.1%, lower than the +0.2% expected.

Year over year, headline CPI is at 2.2% — two-tenths hotter than the year-over-year read last month. The 1-year core figure is 1.7%, indicating, as many other things in the U.S. economy, slight inflation in no hurry to race in either direction. PPI year over year yesterday reached 3.1%, 2.4% core, so we see a bit of a window between what producers are charging and what consumers are willing to pay. As long as this equation is thusly balanced, it reveals a headwind toward further upward inflation.

This all could change if and when tax reform in Congress brings a windfall of revenues to corporations, which remains slated for vote/passage ahead of Christmas break. However, yesterday’s apparent Senate victory in Alabama of Democrat Doug Jones over Republican Roy Moore makes the GOP’s window for error that much smaller; without Moore’s vote to pass the tax bill, the upper house can now only afford one defector during the current reconciliation process.

Yellen’s Final Rate Hike

This afternoon, the Fed is expected to raise interest rates another quarter-point to an overall Fed funds rate of 1.5%. It will have represented the fifth upward revision in the past couple years, with three more quarter-point raises in 2018 expected under the stewardship of incoming Fed Chair Jerome “Jay” Powell.

Analysts do not expect much grandstanding from Chairwoman Janet Yellen, who has seen a nice turnaround in not only U.S. economic growth during her tenure but also with regard to historically low unemployment (4.1%). After her predecessor Ben Bernanke had instituted three separate Quantitative Easing programs to kickstart economic conditions following the Great Recession of late last decade, Yellen proved skillful at landing that plane and slowly but firmly tightening the screws on interest rates, with today providing a coup de grace of sorts.

The Market Roadmap

The Dow and S&P 500 look to make it 5 straight days of gains today, having both closed Tuesday at fresh all-time highs. The tech-heavy Nasdaq has been experiencing some sector rotation here at the end of calendar 2017; we don’t see anything definitively weaker in the Nasdaq compared to the other two major indexes, but profit-taking is a fact of life.

Futures for all three are in the green at this hour, with no real headwinds globally, Q3 earnings season having passed and a wait-and-see attitude on tax reform. Trading volume is also expected to recede as the holidays approach, as well.