Markets brace for hot consumer inflation report next week

Markets brace for hot consumer inflation report next week

Investors are paying close attention to all inflation readings these days, and the Consumer Price Index will be an important one to watch over the coming weeks.

The latest snapshot of the economy comes just a week before the crucial Federal Reserve meeting in September. At this meeting, the Fed is expected to discuss in more detail its bond buying program or its plan to ease quantitative easing.

Market professionals say higher inflation could prompt the Fed to slow down $ 120 billion a month in bond purchases. Reversing its asset purchase program would be the Fed’s first major step in moving away from an easy policy to fight the pandemic.

The consumer price index is due on Tuesday and retail sales data is released on Thursday. Consumer prices are expected to rebound in August at an annualized pace of 5.3%, according to the consensus estimate from FactSet, while consumer spending continued to decline from higher spending levels earlier in the month. ‘year.

Hot CPI

“If the CPI is higher than expected, it could be the difference between making an announcement in September or waiting until November,” said Peter Boucher, chief investment officer at Blakely Advisory Group.

Economists expect the CPI to rise 0.4% month-on-month. The report comes after the August producer price index – which was released on Friday – showed an 8.3% jump year-over-year, due to chain constraints. supply.

The Fed’s official announcement to cut its bond buying program, also known as QE, is widely expected in November or December. Many who expected September’s announcement pushed back their deadline later in the year after an August jobs report that added just 235,000 jobs, about 500,000 fewer provided that.

“Certainly the trend has been for inflation numbers to exceed expectations. I think if that happens again, it will fuel the narrative that higher inflation is going to last. Obviously, this is going to be a big hit for the bond market. The problem is, if seen at all, like accelerating the timing of QE cuts or accelerating the timing of first rate hikes, said David Donabedian, chief investment officer at CIBC Private Wealth US. It would be negative for stocks.

“If there is a rebound in inflation in the markets and there is volatility as a result, they can take it until September,” Donbadian said of the announcement of the decline by the Fed. “But that’s a possibility in four in my opinion.”

Inflationary recession?

The combination of high inflation and slowing spending, especially after the weak jobs report in August, fueled discussions about the threat of a stagflationary slowdown. These concerns have also increased as economists lowered growth forecasts for the third quarter to a still high 5% from 6%.

“I’m more on the ‘flation’ side than the ‘rooster’. I think the economy is going to do well over the next year or so, ”Donabedian said. He said the slowdown in consumer spending following the stimulus checks that boosted retail sales at the start of the year is not surprising and could only be a “short-term warning.”

“We had this explosive growth in retail sales early in the year as a direct result of upcoming stimulus and vaccine payments and a surge of consumer optimism. It’s really settled now, ”he said. “There was a lot of cash and savings and they spent that extra amount of savings and you’re going through a bit of a retracement here, which is why you see economists marking your Q3 projections. Looking at… The fundamentals of consumption are pretty good.

Barclays chief U.S. economist Michael Gapen said he expected the CPI report to show inflation was leveling off, as the Fed said. But he says the slowing trend isn’t just a problem for consumer spending. This is also visible in business spending and housing.

“Where the labor markets are, August was a bit of a egg. But job growth has been strong on average, very strong over the year, ”he said. “Even though employment was disappointing in August, the hours and earnings were still excellent. There is income to be spent on consumers. We see this as a short term hiccup.

Gapen said economic growth in the third quarter could be slightly slower than expected. However, he added that some of the lost growth could be visible in the fourth quarter.

“It has some characteristics of stagflation, but the real stagflation is rising unemployment and rising inflation. We don’t have that, ”he said. “These are the constraints that hamper the pace of recovery and lead to higher inflation. Demand is not yet the problem. The supply is. The unemployment rate continues to decline and employment is improving. But I wouldn’t call it stagflation.

Donabedian expects higher prices and shortages to continue next year, as supply chains continue to be disrupted. Some companies, including PPG and General Electric, have already commented on their vision for supply issues through 2022. Donabedian expects to see more warnings ahead of the third quarter earnings season.

The stock was down this week, with the S&P 500 falling 1.7% to 4,458. A closely watched 10-year Treasury yield topped 1.3% to settle at 1.33% on Friday.

Many strategists generally expect the stock market to experience volatility during the period of September and October. Some say the Fed meeting in September could be a catalyst, especially if the central bank seems particularly tough.

“We have grown by over 30% in 2019, up from 18% last year and over 21% in the first few months of this year,” Donabedian said. “These are fluctuating rates or returns. … Our conclusion is that it’s going to be difficult from here. Valuations have been raised somewhat and this whole incredibly favorable political framework is going to be a little less favorable. “

Watch the Congress now

Donabedian said it would be important to see a discussion in Congress as he begins to lay out the details of infrastructure spending and the type of tax increase that would be proposed to pay it.

“They are going to start filling in the blanks where the money is spent and what taxes and tax rates are written into law,” he said. “It’s the overall corporate tax rate, it’s the foreign earned income tax, the capital gains rates and the dividend tax rate. These are big investor issues.

He said the market ignores the issue of taxation. “Problems like this calmed down over the summer, but over the next two weeks it’s completely boring. It will attract a lot of attention. “

Tax rulings can have a major impact on corporate profits, which have been a major driver of stock market gains. “A very straightforward way that can go wrong is if you get a huge set of tax hikes that will take effect in 2022. It’s a straight haircut,” he said.

upcoming week calendar

On Monday

Earnings: Oracle

2:00 p.m. Federal Budget Statement

Tuesday

06:00 NFIB small business sindex

8:30 am IPC

Wednesday

7:30 a.m. Weekly mortgage application

08:30 am Import price

Empire State Manufacturing at 8:30 a.m.

9:15 am Industrial production

Thursday

Unemployment claims at 8:30 a.m.

8:30 a.m. Philadelphia Fed Poll

8:30 am retail

4:00 p.m. tic data

Friday

10:00 am Consumer sentiment

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