Investor sentiment sours - AAII

INVESTOR SENTIMENT SOURS - AAII (1348 EST/1848 GMT)

The mood among investors has grown more pessimistic, with "bearish" sentiment touching a four-week high.

The latest sentiment survey from the American Association of Individual Investors showed that the share of investors with a "bullish" outlook - expectations that stock prices will rise over the next six months - also gained some ground, rising 30 basis points to 24.7%.

Even so, the bulls have now logged 49 consecutive weeks below their historical average of 37.5%.

In contrast, "bearish" sentiment - reflecting expectations that stocks will fall in the next six months - posted a more robust 1.4 percentage point gain to 41.8%, marking the 52nd week of the last 55 above its long-term 31.0% average.

Those who predict stocks will be unchanged over the next six months accounted for a smaller slice of the pie, down 1.7 percentage points to 33.5%, above its 31.5% historical average.

What do these numbers really mean?

AAII reminds us that they can be counterintuitive:

"The Sentiment Survey is a contrarian indicator. Above-average market returns have often followed unusually low levels of optimism, while below-average market returns have often followed unusually high levels of optimism," the report says.

The graphic below shows the bull/bear spread (bullish minus bearish), which has edged to its most pessimistic reading since mid-November:

(Stephen Culp)

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DOLLAR SELLOFF OVERDONE IN SHORT-TERM (1200 EST/1700 GMT)

The U.S. dollar could be buoyed near-term by over optimism over how fast inflation is likely to drop, even as it faces a worsening medium-term outlook, according to Bank of America.

“The two most important questions for next year are how fast inflation will drop and how much will inflation need to drop for the Fed to stop tightening? We are concerned that the consensus expects inflation to drop too fast and the Fed to pause too early,” BofA analysts Athanasios Vamvakidis and Claudio Piron said in a report.

“This explains recent price action, with the market bias against the USD. We are also bearish the USD for next year, but we believe the market may have run ahead of itself and we expect a stronger USD in Q1,” they said.

The dollar index against a basket of major currencies DXY has fallen to 104.75 from a 20-year high of 114.78 on Sept. 28, a more than 8% drop, as investors bet the Federal Reserve is close to the end of its tightening cycle as inflation moderates.

“A key call for us next year is that inflation will be sticky on the way down. The consensus still expects inflation in advanced economies to drop all the way down to 2%, or close enough, by 2024. This seems optimistic to us,” Bank of America said.

The bank expects the dollar will end 2023 at $1.10 against the euro EURUSD, from $1.055 now.

(Karen Brettell)

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YES VIRGINIA, THERE IS INFLATION: PPI, UMICH (1111 EST/1611 GMT)

Investors were shocked - SHOCKED, I tell you - by data released on Friday that showed inflation is a thing.

Spoiler alert: it's a thing.

Consumers, on the other hand, weren't terribly bothered by the news, and appeared to be making moves toward crossing to the sunny side of the street.

The bad news: prices U.S. companies get for their goods and services and the proverbial factory door held steady in November, landing north of consensus.

The Labor Department's Producer Prices report (PPI) (USPPFD=ECI) showed monthly "final demand" growth of 0.3%, repeating October's increase, while the core rate - which excludes food, energy and trade services - actually gathered heat, gaining 0.1 percentage point to 0.3%.

The good news: on an annual basis, PPI fell across the board, with the headline and core readings falling to 7.4% and 4.9%, respectively.

It marks the lowest annual core print since April 2021.

Calling the report "disappointing," Peter Cardillo, chief market economist at Spartan Capital Securities added "it's not the end of the world. But certainly, a negative surprise for the markets."

"It still shows inflationary pressures in the pipeline and that's not good news for the Fed."

Drilling deeper into the report, "intermediate demand" - which reflects business-to-business prices - provided even better news nearly across the board, including a 3.2% monthly drop in raw materials and a 0.9% monthly drop in processed goods.

Taken together, while investors might fret over the upside surprise, this report shows the lowest annual headline and core PPI growth since the first half of last year.

Of course PPI is just a warm-up act for Tuesdays consumer prices data (CPI), which is expected to show a cool-down in the headline number and a slight acceleration in the core measure.

The graphic below shows annual core PPI growth along with other major indicators, and the distance they have to descend before coming into alignment with the Fed's average annual 2% inflation target:

Separately, the American consumer appears to be getting into the holiday spirit, albeit begrudgingly.

University of Michigan's initial stab at December consumer sentiment (USUMSP=ECI) gained 2.3 points to land at 59.1.

While still wallowing in depressed levels, all components gained ground, with the one-year business outlook surging 14 points.

"Gains in the sentiment index were seen across multiple demographic groups, with particularly large increases for higher-income families and those with larger stock holdings, supported by recent rises in financial markets," notes Joanne Hsu, director of UMich's Surveys of Consumers.

Below, "current conditions" and "expectations" can be seen ticking higher and converging, although the glass half-empty types will be quick to point out that both remain well below the levels to which they plunged in the immediate aftershock of pandemic shutdowns.

Worries over rising prices have eased, but modestly.

Five-year inflation expectations held firm at 3%, while the shorter-term one-year outlook cooled 30 basis points to 4.6%.

That's much closer to the elusive Fed target than the scalding hot 6.3% core CPI print for October, which put market participants in a dither.

While Wall Street initially set itself up for a day of sulking in deep red territory after the PPI report, investors seemed to simmer down by the opening bell.

The S&P and the Nasdaq were last up on the day.

(Stephen Culp)

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STOCKS DROP AS PRODUCER PRICES BEAT EXPECTATIONS (0940 EST/1340 GMT)

Stocks dipped on Friday after data showed that producer prices rose in November at a modestly higher rate than economists expected, again bringing to the fore concerns that the Federal Reserve will hike rates higher for longer.

The producer price index for final demand rose 0.3% last month and increased at an annual rate of 7.4%. Economists polled by Reuters had forecast the PPI climbing 0.2% and rising 7.2% year-on-year.

“Directionally, inflation is heading in the right place but sequentially, it disappointed expectations,” said Art Hogan, chief market strategist at B. Riley in New York.

The Fed is expected to hike rates by an additional 50 basis points when it concludes its two-day meeting on Wednesday and investors will be watching for how high Fed officials ultimately expect to hike rates.

"The next big concern that we’ll have and would learn more about at the (Fed) meeting on Wednesday is that the terminal rates for the Fed funds may nudge higher from 4.75% to 5%, which is the range of consensus now, to 5%-5.25%," said Hogan.

A possible wildcard for the meeting will be consumer price inflation data that is due on Tuesday.

The Nasdaq Conmposite IXIC was the worst performing major index and info tech S5INFT was the weakest sub sector.

Here is where markets stood in early trading: