Inflation will be the hot topic of the markets in the coming week

With new evidence that the job market is on the mend, investors are focusing on inflation over the coming week and whether it will continue to heat up or show signs of slowing down.

There is a series of expected inflation data: the consumer price index and the producer price index, released on Wednesday and Thursday respectively.

Employment and inflation are two key factors that influence the Federal Reserve in its policy decisions. Markets are hanging on to anything that will help determine when the central bank will begin to move away from the measures it has taken to support the economy during the pandemic, including its $ 120 billion per month purchases of Treasury bonds and mortgage backed securities.

Friday’s July jobs report showed a healthy 943,000 payroll increase. This gain is enough to make Fed watchers think that the central bank could announce in the coming months that it will cancel its support measures. This is important because ending the bond buying program is a first step towards raising interest rates. It was the Fed’s near-zero rate policy that helped boost liquidity fueling stock market gains and keeping rates low.

“I think the keys for next week will be both the CPI and the PPI. We get inflation data for consumers and for businesses. These will be watched closely. Unemployment claims also, ”said Michael Arone, chief investment strategist at State Street Global Advisors. noted.

“The Fed has made it clear that the job market is key to what it does next,” he added. “Unemployment claims will continue to be an item that is looked at every week. Then we’ll finally get consumer sentiment. These are four things that could be driving the market.”

The Fed has said that high inflation, surpassing 5% at the consumer level recently, is only temporary. Economists polled by Dow Jones expect another hot reading for the consumer price index, with core inflation up 0.4% or 4.3% year over year . The CPI is released on Wednesday. Headline inflation stood at 5.4% in June, and the core, excluding food and energy, at 4.5%.

“This 0.4% follows a 0.9% increase in June,” said Peter Boockvar, chief investment officer of Bleakley Advisory Group. “Then you get the PPI on Thursday and the import prices on Friday. Import prices are up and import prices are expected to rise 10.5% year over year. follows over 11% the previous month. “

Economists said if there was another strong jobs report for August, it would help the Fed start cutting back on its bond buying program. But a wild card for the economy is the course of the latest Covid outbreak and whether it will dampen economic activity and hiring.

Arguing that inflation is fleeting, Fed Chairman Jerome Powell pointed to what appears to be a temporary sharp rise in used car prices, as well as falling lumber prices after a sharp rise. The Fed’s inflation target is 2%, but policymakers have said they will tolerate an average range of around 2% before acting, as long as inflation doesn’t stay too high for too long.

“Used car prices are starting to show signs of moderation. [rising], ‘”said Boockvar.”‘ You are showing me a drop in timber prices. I’m going to show you a 10-year high in aluminum prices. ‘ Look at natural gas. It is at its highest for six years. It’s a wide base. “

A prolonged period of inflation would hurt the economy and negatively affect stocks. Until now, companies have passed the higher costs on to their customers in the form of higher prices, but if they cannot do so at some point, profit margins will decline.

There are a few Federal Reserve officials who will be speaking in the coming week. Market pros expect them to help clarify the central bank’s intentions on tapering. The Fed is expected to announce in September or later in the fall that it will cut its bond program by $ 120 billion per month, starting at the end of the year or early in the year. ‘next year.

The decrease should be gradual and continue for 10 months or more. The Fed’s own forecast shows that its first rate hikes will take place in 2023.

More information could come from the Fed when officials meet for their annual symposium in Jackson Hole, Wyoming, later this month. But action is not expected to be taken until the September meeting or later.

“We have two voters on Monday speaking and this is important. Both lean towards reduction,” Boockvar said.

“You could add a few more voices to that,” he said. “It could be a confrontation between [Fed Governor] Lael Brainard and [Chicago Fed President] Charles Evans on one side and [Fed Governor Christopher] Waller and some of those Fed chairmen on the other. “

The bond market responded to the idea that the Fed could slow down its bond buying policy. The 10-year Treasury yield climbed to 1.29% on Friday afternoon, after hitting a low of 1.13% during the week.

Yields, which move opposite to prices, had fallen due to a number of factors, including concerns that Covid is disrupting the economy.

John Briggs of NatWest said the 10-year yield may now move to a new higher range, following the jobs report. “Maybe you are now in a range of 1.10% to 1.30%, you are in a range of 1.20% to 1.40%. Maybe you are moving the range a little higher “, did he declare.

Briggs said the bond market would be hit if the inflation figure was higher than expected. “I think it will matter. I’ve always thought the inflation story is the real story anyway. We have rents going up in the second half of the year. This will keep it going. inflation above 3%. This is going to be a challenge for the Fed, “he said.

As for equities, State Street’s Arone expects the market to continue to “recover.”

The Dow Jones and S&P 500 closed at new highs on Friday. The Dow Jones gained 0.8% for the week, ending at 35,208, while the S&P 500 edged up 0.9% to 4,436. The Nasdaq rose 1.1% for the week to 14,835 .

Profits continue to unfold over the coming week, but the volume of exits is drastically decreasing. Reports are expected from Walt Disney, eBay, Wendy’s and others.

“Profit season, we’ll put it behind us. It was stellar. Then we have kind of a vacuum between earnings and Jackson Hole,” Arone said.

“The market seemed to take news of the variants with ease, but investors are cautious,” he said. “The number of jobs helps alleviate some of these growth fears, worries about slowing growth. Numbers like this certainly help investors get over their anxiety about it.”

On Monday

Earnings: Viatris, BioNTech, Barrick Gold, Air Products, AMC Entertainment, CF Industries, Planet Fitness, Elanco Animal Health, US Foods, 3D Systems, Ethan Allen, Tegna

10h00 SHOCKS

10:10 a.m. Raphael Bostic, President of the Atlanta Fed

12:00 p.m. Richmond Fed President Thomas Barkin

Tuesday

Earnings: SoftBank, Coinbase, Sysco, Chesapeake Energy, Super Micro, WW International, Casper Sleep, Aramark

6:00 a.m. NFIB Small Business Survey

8:30 am Productivity and costs

1:00 p.m. Auctions of $ 58 billion 3-year bonds

2:30 p.m. Chicago Fed Chairman Charles Evans

Wednesday

Earnings: eBay, Wendy’s, Perrigo, Lordstown Motors, Opendoor Technologies, Nio, Rackspace, Vroom, Marqeta, Sonos, Bumble

8:30 am IPC

10:30 a.m. Bostic from the Atlanta Fed

12:00 p.m. Kansas City Fed President Esther George

1:00 p.m. Auctions of $ 41 billion 10-year bonds

2:00 p.m. Federal budget

Thursday

Earnings: Walt Disney, Baidu, Airbnb, CyberArk Software, Azek, Palantir Technologies, DoorDash, SoFi

8:30 am Weekly unemployment claims

8:30 am PPI

1:00 p.m. Treasury auctions for $ 27 billion in 30-year bonds

Friday

8:30 am Import price

10:00 am Consumer sentiment