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New inflation data supports a stock-market rally into year end as the Fed could end its rate hikes this month, Fundstrat says

Tom Lee

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  • November’s cooler-than-expected CPI report puts less pressure on the Fed to continue with its interest rate hikes, according to Fundstrat.
  • The firm says that’s supportive of a stock-market rally into year end.
  • It highlighted that 1-month annualized inflation fell to 2.4% in November, right around the Fed’s long-term 2% target.

The November CPI report could be a game-changer for the Federal Reserve and clear the way for a year-end stock market rally, Fundstrat’s Tom Lee said in a Tuesday note.

That’s because inflation continues to fall considerably from its peak, and the 1-month annualized inflation rate is now approaching the Fed’s long-term inflation target of 2%.

Ultimately, the continued drop in inflation and a potentially dovish Fed means the S&P 500 can stage a year-end rally to as high as 4,500, according to Lee, representing potential upside of 12% from current levels.

November’s CPI report showed headline CPI at +0.1% and core CPI at 0.2%, compared to economist estimates of 0.3% and 0.3%, respectively. 

The inflation report shows 1-month annualized inflation fell to 2.4% in November, which is down from 3.6% in October, according to Lee. Meanwhile, the 3-month annualized core inflation rate is now down to 4.2%, compared to 5.6% last month.

The ongoing step-down in the inflation rate ultimately puts less pressure on the Fed to continue with its outsized interest rate hikes, and Lee thinks the rate hikes could ultimately end after today’s interest rate decision.

“2-year less Fed Funds by the end of this week will be below zero. Market saying Fed might be done after December. Thus, we see support for year-end rally. This is a dovish surprise and argues for a dovish change in Fed reaction function,” Lee said.

The Fed is expected to hike interest rates by 50 basis points at its 2pm press conference today. Meanwhile, the market now expects only a 25 basis point interest rate hike at its FOMC meeting in February.

Digging deeper into the inflation report, there are several components that suggest the decline in inflation from its June peak will continue into 2023.

Food prices have slowed for two months in a row, energy prices are tanking, used car prices are falling at an annualized rate of 36%, shelter prices are slowing, and medical care service prices are falling at an annualized rate of 40% and is repeatable due to its annual adjustment, Lee highlighted.

“The trend is obvious,” Lee said. “Inflation is slowing and falling like a rock.”

Read the original article on Business Insider