[Altos Weekly Traders Edge] Inflation Watch & Today's CPI Report...Details Inside

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Inflation Watch: Why Todady's CPI Report Could Rock the Markets

Weekly Market Overview

Hi Traders,

Grab on to something folks, this Wednesday's release of the December Consumer Price Index (CPI) data is shaping up to be a make-or-break moment for the markets, and investors are understandably on edge. Why all the fuss? Because this isn't just another economic report; it's a crucial indicator that could send both stocks and bonds on a rollercoaster.

The headline here is that the annual inflation rate, after a period of decline, is anticipated to tick upwards for the third month in a row, potentially reaching 2.9%. This is a notable shift, as it would be the first time the rate has approached 3% since before the Federal Reserve started cutting interest rates in 2024.

A Potential Shock to the System?

A higher-than-expected CPI reading could seriously rattle investors. It might solidify the notion that the Fed's rate-cutting spree is over for the foreseeable future and may even spark talk of potential rate hikes. On the other hand, a cooler-than-expected report could soothe some of the market's anxieties.

It's More Than Just a Number

But the devil is in the details. Experts are paying close attention to the "core" CPI, especially the sticky "core services excluding shelter" component. This area of inflation has proven stubborn, and any significant jump – say, above 0.5% for the monthly core CPI – could trigger a negative reaction in both stock and bond markets.

What Could Happen?

Experts suggest that any renewed surge in inflation could lead to a reassessment of appropriate yields on Treasury securities, potentially pushing those yields upwards. Given the stock market's current sensitivity to Treasury yields, this could then lead to a re-evaluation of appropriate equity valuations. Some are even saying that a 10-year Treasury yield of 5% isn't out of the question, depending on how significant any acceleration in CPI turns out to be.

Mixed Signals and Rising Concerns

Tuesday's producer-price index (PPI) report provided a small glimmer of hope, coming in tamer than expected. However, this is seen more as a predictor of future CPI trends, rather than an accurate reflection of the current situation. There are some other red flags, too. Recent consumer surveys show increasing expectations for future inflation, and market-based inflation expectations are also drifting further away from the Fed's 2% target.

The Bottom Line: Asymmetric Risk

Market sentiment appears to be leaning towards a "heads we lose, tails we don't win much" scenario. If Wednesday's CPI data comes in hot, it could fuel fears of even higher inflation to come. Conversely, a lower-than-expected number might be dismissed as a temporary blip.

In short: Wednesday's CPI report is a big deal, and it has the potential to significantly impact market direction in the coming weeks. Investors should be prepared for a potentially bumpy ride.

- The Team at Altos Trading

In the next article, no matter how much power shifts in Washington, the markets—our untouchable "Fifth Estate"—will always have the final say.

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The Fifth Estate: Why Markets Will Check Political Power

There’s a lot of talk these days about which powers the incoming administration will soon command—and about the possibility that almost nothing will stand in its way. Yet there is at least one force in public life that remains beyond anyone’s direct control: the markets.

The Scottish writer Thomas Carlyle once referred to the press as the “Fourth Estate,” suggesting that news organizations formed a mighty political power. Whether that was ever accurate, many would agree that journalism’s influence has waned. But if the Fourth Estate has lost its punch, the “Fifth Estate” remains firmly in place: the markets for stocks, bonds, commodities—everything from eggs to soybeans to frozen-concentrated-orange-juice futures. Prices shift second by second, and no one can simply command them to stay put.

The new president is poised to assume office with a party-friendly Congress and Supreme Court, leading some to speculate that every lever of authority will be under the administration’s thumb. Others have raised extreme scenarios in which official statistics are doctored or far-fetched policies are enacted without challenge.

But in reality, if a government tried to manipulate inflation data or take other radical steps, the bond market would waste no time reacting—likely with alarming force. The result could be a surge in Treasury yields, a drop in bond prices, and a ripple effect through every corner of finance, from the stock market to home loans. Investors who might otherwise cheer for a particular policy quickly change their tune when it threatens their portfolios.

This is hardly hypothetical. A major selloff in the Treasury market would make borrowing costs skyrocket and send shockwaves into equities. In the meltdown of 2008, such dramatic swings plunged the country into panic. No president or politician wants a repeat, and neither do those in Congress who rely on donors and voters unamused by watching their savings evaporate.

Recent events already hint at what can happen when bold announcements or controversial appointments catch the markets off guard. Yields have jumped, and stocks have occasionally wobbled in response to the shifting landscape. While inflation concerns and changes in Federal Reserve policy play a role, there’s also a factor that can be described as an “uncertainty premium”: the fear that unorthodox policies could upend the careful balance of debts, deficits, and interest rates.

America, unlike certain fictional characters known for slipping away from creditors, cannot easily dodge the consequences if debts and deficits spin out of control. If the administration and Congress proceed with aggressive tax cuts and scant spending restraint, the Fifth Estate will eventually weigh in. Bond prices can sink long before any official crisis, and market tremors can sway political decisions back toward more measured paths.

None of this guarantees smooth sailing or immunity from volatility. But it does mean that, no matter how much power a new president wields or how many seats one party controls, the markets will always have their say. In that sense, this “Fifth Estate” stands apart—and stands ready to respond to whatever Washington attempts next.

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The Altos Trading Alert Newsletter is published as an information service for subscribers, and it includes opinions as to buying, selling and holding various stocks and other securities. However, the publishers of the Altos Trading Alert Newsletter are not brokers or investment advisers, and do not provide investment advice or recommendations directed to any particular subscriber or in view of the particular circumstances of any particular person. Altos Trading, including its owner, does not participate in any trades issued through the alert services. Subscribers to Altos Trading or any other persons who buy, sell or hold securities should do so with caution and consult with a broker or investment adviser before doing so.

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