The upcoming inflation data holds increased significance after Friday’s surprisingly weak jobs report, which has altered the Federal Reserve’s interest rate trajectory. Stocks rallied on the news, as investors interpreted the job losses as a sign the Fed might delay rate hikes in September.
Economists expect inflation to remain elevated, though potentially slightly softer than June’s figures. The focus now shifts to the CPI and PPI reports, as markets gauge the Fed’s next move amidst concerns about stagflation versus hopes for a continued market rally.
The anticipation surrounding next week's inflation data has intensified following a surprising jobs report that has added a new layer of complexity to the interest rate outlook. Stocks experienced an uptick on Friday, closing out a strong start to the month after the latest nonfarm payrolls report revealed an unexpected decline in jobs for July.
According to the Bureau of Labor Statistics, nonfarm payrolls decreased by a seasonally adjusted 23,000 last month, while the unemployment rate saw a slight dip to 4.1%. Despite the concerning labor market data, investors reacted positively, interpreting the weakness as a signal that the Federal Reserve might hold off on rate hikes in September. This sentiment emerged amid growing concerns on Wall Street in recent weeks, particularly after three dissenting votes at the July Federal Reserve meeting favored an increase in rates.
Consequently, the probability of the Fed implementing a quarter-point rate hike in September fell to 42% on Friday, down from 55% the previous day. Treasury yields also retreated, with the 2-year Treasury yield, a key indicator of Federal Reserve policy expectations, dropping to approximately 4.2%, providing further support for equities.
Ups the Ante for Inflation Reports
This development escalates the importance of next week's Consumer Price Index (CPI) and Producer Price Index (PPI) reports for July. The Federal Reserve has been vigilant regarding the risks of persistent inflation and has expressed confidence in the labor market's strength. However, the lackluster jobs data suggests the central bank may need to consider the potential impact of weakening consumer spending.
"They're going to have to pay attention to both of their mandates, both full employment and stable prices," stated Art Hogan, chief market strategist at B. Riley Wealth. "Friday's labor report thrust a lot more importance on what has become [the] most important pieces of economic data: CPI, PPI, and PCE. And next week, we'll get two of those."
Economists are not anticipating significant relief from inflation pressures. FactSet consensus estimates project the July CPI to rise by 3.4% year-over-year, a slight decrease from June's 3.5% increase but still considerably above the Fed's 2% target. A particularly concerning scenario would be an unexpectedly high inflation report, hinting at stagflation—a combination of stubborn inflation and sluggish economic growth. Such a scenario could force the Fed to raise rates even as consumers grapple with a weakening economy and rising prices.
Conversely, investors are hoping for a milder inflation report that would provide the Fed with a justification to maintain its current policy stance in September. In recent weeks, some analysts and investors have suggested that pricing pressures may not be as severe as feared, especially with the potential easing of U.S.-Iran hostilities leading to lower oil prices. There is a prevailing confidence in a potential deal to reopen the Strait of Hormuz, despite the lack of a definitive timeline.
In this environment, Fundstrat's Tom Lee has posited that the S&P 500 could reach 8,000 in the coming weeks, a target not entirely unreasonable given its recent trading levels around 7,750, representing a mere 3% difference. The market has shown considerable exuberance, with major averages achieving their best weekly performance since April, and the semiconductor sector making a strong comeback from its July downturn.
Investors are optimistic that the recent artificial intelligence sell-off has trimmed some of the market's froth, potentially allowing stocks to continue their upward trajectory for at least a few more weeks. The S&P 500 touched new all-time highs twice this past week, on Monday and Tuesday, while the Nasdaq Composite closed the week with a gain of over 5% compared to the previous Friday. However, with investors scrutinizing every data point for clues on the Fed's next move, especially amidst reduced communication from the central bank, the potential for increased volatility remains high.
"It is a picture that gets more complicated for the Federal Reserve," Hogan remarked, "and what they do with monetary policy."
Week Ahead Calendar (All times ET)
- Monday, Aug. 10: Earnings: Simon Property Group
- Tuesday, Aug. 11: 8:15 a.m. ADP Weekly Employment Change (07/25); 10:00 a.m. Existing Home Sales (July); Earnings: Super Micro Computer, Lumentum Holdings, Cardinal Health
- Wednesday, Aug. 12: 8:30 a.m. Consumer Price Index (July); 8:30 a.m. Hourly Earnings (July); 8:30 a.m. Average Workweek final (July); 2:00 p.m. Treasury Budget (July); Earnings: Coherent
- Thursday, Aug. 13: 8:30 a.m. Initial Jobless Benefit Claims (08/08); 8:30 a.m. Producer Price Index (July); Earnings: Applied Materials, Tapestry
- Friday, Aug. 14: 8:30 a.m. Retail Sales (July); 10:00 a.m. Business Inventories (June); 10:00 a.m. Michigan Sentiment preliminary (August)
