The November Consumer Price Index (CPI) report is out, and it shows a tad more progress on the Fed's inflation fight than the market was looking for even though they remain quite a distance from the Fed's stated 2% target.

Equity futures strengthened following the report and point to a strong market open, but in our view the surge is potentially overdone given the magnitude of the surprise contained in the November data.

The Fed still has more work to do ahead of it, and while today's data will cement the market's expectations for a 50-basis point rate hike from the Fed tomorrow, it's Fed Chair Powell's comments about the terminal level for the Fed Funds rate that will carry far more weight as will any insight for how long the Fed expects to keep it at that level.

More than few times this year, we've seen market hopium take over only for the Fed to throw cold water on it as it reminds us that it still has work to do, and it won't quit until the job is done.

We also have to consider there is some short covering going this morning on following the CPI data, but the findings from the December ZEW Indicator of Economic Sentiment for the Euro Area, the November NFIB Small Business Optimism Index, dollar headwind comments from Oracle (ORCL) , and Eli Lilly (LLY) guiding 2023 earnings below expectations all reaffirm concern for 2023 earnings expectations.

We'll dig into those in a standalone note later today, but take a closer look at the November CPI report and what it means for the AAP portfolio:

  • Headline November CPI came in at +7.1% YoY vs. the expected reading of +7.3% and October's 7.7% figure.
  • Core CPI, which excludes food and energy prices, rose 6.0% in November, a tad slower than the market consensus of +6.1% and down from October's 6.3% reading.

On a sequential basis, food prices continued to climb in November, rising 10.6% on a year over year basis. With food inflation still hitting consumer wallets, we continue to see consumers flocking to Costco (COST) , a company that derives roughly half of its revenue from food, sundries, and fresh food.

Both food at home and away from home rose 0.5% month over month but the protein complex (beef, pork, and poultry) was down compared to October. On our December Members-Only call we discussed the decline in chicken prices over the last few months, but this rounds out the list of protein ingredients used by Chipotle (CMG) . We'll look for further improvement but what we saw in today's November CPI report increases the likelihood Chipotle's pricing action earlier this year goes from offsetting higher input prices to helping drive margin improvement in the coming quarters.

Overall energy prices declined on a sequential basis in November with gasoline and utility gas services leading the way - no major surprise given data from AAA that shows average gas prices are down vs. year ago levels. Used car prices also continued to decline for the fifth month in a row and fell 3.3% month over month. We attribute that to continued progress on new vehicle production levels and those prices rose more than 7% year over year.

All other categories tracked by the report - apparel, medical care commodities, and services were all up year over year.