The good vibes on Wall Street engendered by last week’s “Goldilocks” jobs report are set for a gut check.

Inflation figures for December, due Thursday, are generally seen as the deciding factor for the Fed when it comes to the size of the next rate hike. Although the cooler-than-expected read on average hourly earnings that accompanied December payrolls was welcome news (particularly given the downward revision to the prior month’s reading), it’d be overshadowed by evidence that consumer price growth picked back up last month.

Consensus expects to hear that core prices rose 0.3% from November, while headline prices were flat. If realized, such prints would count as another incremental win for the “soft landing” crowd, but please, for your own sanity, eschew the temptation to suggest “team transitory” is still a viable meme. Inflation wasn’t transitory. That debate was settled in 2022. If you were on the transitory Titanic, the best you could do was hurdle and stiff-arm your way onto a life boat and ferry yourself over to the soft landing ship which, while leaking, remains afloat.

The CPI report will be parsed for evidence that services inflation is (or isn’t) cooling. Barring another energy shock, disinflation on the goods side is a fairly safe bet for 2023, with the caveat that no bets are truly safe when we’re talking about economics. Macroeconomics is, in many respects, just bird watching, only with humans. Or sociology, but with money, if you like.

When it comes to goods deflation, the math is favorable and should be somewhat immune to the vagaries of human behavior, but the geopolitical shifts witnessed over the past several years aren’t complete. Anything can happen and, as we’re learning the hard way in the 2020s, our near universal faith in “just-in-time” was extraordinarily naive. We worshipped JIT with something approaching religious zeal. The pandemic led to a collective “Why hast thou forsaken me?” moment.

But optimistically assuming goods disinflation does play out as expected, there are still question marks on the services side. That’s where traders will focus their attention this Thursday, when the US CPI report takes center stage. PMIs released last week suggested services sector activity is cooling rapidly in the US, which should eventually lead to softer price growth — “eventually” is the key word.

Although the market narrative has coalesced around the notion that another relatively benign CPI report would make the case for a 25bps Fed hike early next month (versus 50bps), I’d suggest the Committee isn’t as eager to revert to “regular” increments as some traders seem to believe.

The December meeting minutes betrayed palpable concern with the market’s interpretation of the step-down from 75bps to 50bps, and the FOMC will be wary of triggering another November-style easing in financial conditions.

Last week’s Fed rhetoric was overtly aggressive, and while it’s probably true that some of the recalcitrant balderdash should be taken with a grain of salt, you could argue that if the Fed is “secretly” concerned about the prospect of a Wile E. Coyote moment for the economy, but still genuinely believes that “sufficiently restrictive” is more than one 25bps increment away, it’d be preferable to get another 50bps move in now, while the labor market is still strong.

On the other hand, Jerome Powell did indicate during last month’s press conference that the Fed might be “more comfortable probing where the terminal rate is in 25bps increments going forward,” to quote Nick Timiraos, who queried Powell on the size of future hikes.

“It’s tempting to suggest that moderating wage data, sub-50 ISMs (both services and manufacturing) and an as-anticipated CPI release would prompt the Fed to downshift further to a 25bps hike in February,” BMO’s Ian Lyngen and Ben Jeffery said. “Certainly, a decided downside miss on core CPI would support the quarter-point camp [but] a 0.3% core CPI move isn’t modest by pre-pandemic standards and in the event Powell’s conviction to reestablishing Fed credibility remains high, there is a solid case to be made for a 50bps increase,” they added.

“We don’t think the payroll report changes the calculation for the labor market or the Fed,” TD’s Priya Misra remarked. She sees rates peaking at 5.25-5.5%. “The market will remain torn on whether the Fed will hike 25bps or 50bps in February,” she added. “We think 50bps as the Fed remains focused on inflation.”

Also on deck in the new week: NFIB and the preliminary read on University of Michigan sentiment for January. Fed speakers include Bostic, Bullard, Harker and Powell, who’ll speak at a Riksbank symposium.