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Investors are paying close attention to any reading on inflation these days, and the Consumer Price Index will be the most important one to watch over the coming week.
The latest snapshot of the economy comes just a week before the important Federal Reserve meeting in September. At this meeting, the Fed is expected to discuss in more detail its plan to reduce its bond buying or quantitative easing program.
Market professionals say a rise in inflation could accelerate the Fed’s plans to slow down the $ 120 billion a month bond purchases. Cutting back on its asset purchase program would be the Fed’s first major step in moving away from the easygoing policy it has put in place to fight the pandemic.
The consumer price index is due on Tuesday, and retail sales data is released on Thursday. They should show that consumer prices jumped at an annual pace of 5.3% in August, according to FactSet’s consensus estimate, as consumers continued to pull back from the high spending levels of the start of the year. year.
Hot CPI
“If the CPI is higher than expected, it could make the difference between a cut announcement in September or a wait until November,” said Peter Boockvar, chief investment officer of Bleakley Advisory Group.
Economists expect the CPI to rise 0.4% month over month. The report comes after the August producer price index – which was released on Friday – showed an 8.3% jump year-over-year, in part 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 a September announcement pushed back their timelines to later in the year after the August jobs report showed only 235,000 jobs added, about 500,000 fewer provided that.
“Certainly the trend has been for the inflation count to exceed expectations. I think if that happens again, it will fuel the narrative that high inflation is going to persist. Obviously, this is a problem for the bond market. if it is considered at all to hasten the time of QE cut and / or hasten the time of the first rate hike, “said David Donabedian, chief investment officer of CIBC Private Wealth US. It would be negative for equities. .
“If the markets have an inflation mutiny here and there is volatility as a result, they could move it until September,” Donabedian said of the Fed’s announcement of the cut. “But I think there is sort of a probability in four in my opinion.”
Stagflation?
This combination of higher inflation and slower spending, especially after the weaker August jobs report, has stimulated discussions about the threat of stagflation. These concerns have also grown as economists lowered growth forecasts for the third quarter to a still high level of just above 5% from more than 6%.
“I’m more on the ‘flation’ side than the ‘stag’. I think the economy is going to do well until next year,” Donabedian said. He said the slowdown in consumer spending after stimulus controls boosted retail sales earlier in the year is not surprising and may only be a “short-term warning.”
“We had this explosive growth in retail sales at the start of the year as a direct result of stimulus payments and upcoming vaccines and a surge of consumer optimism. It’s really settled now,” a- he declared. “There was a huge amount of cash and savings and they spent what they spent with that extra amount of savings and you’re going through a bit of a retracement here, which is why you see economists jotting down their estimates. Q3. Consumer fundamentals are pretty good. “
Barclays chief U.S. economist Michael Gapen said he expects the CPI report to show inflation to peak, just as the Fed has said. But he says the slowing trend isn’t just a problem for consumer spending. It is also manifested in business spending and housing.
“With the labor market situation August was a bit of a egg. But job growth has been strong on average, very robust over the year,” he said. “Even though employment disappointed in August, hours and earnings were still pretty good. There is income to be spent for consumers. We see this as a short-term setback.”
Gapen said economic growth in the third quarter could be a bit slower than expected. However, he said some of the lost growth could show up in the fourth quarter.
“It has some characteristics of stagflation, but real stagflation is increased unemployment and increased inflation. We don’t have that,” he said. “These are bottlenecks that are somehow slowing the pace of the recovery and leading to higher inflation. Demand is not the problem right now. Supply is. Unemployment continues to rise. go down and jobs get better. 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 previously explained how they view supply issues through 2022. Donabedian expects to see more warnings ahead of the third quarter earnings season.
Stocks were down this week, with the S&P 500 losing 1.7%. The closely watched 10-year Treasury yield held above 1.3% and was at 1.33% on Friday.
A number of strategists expect the stock market to retreat during the generally turbulent period of September and October. Some say the Fed’s September meeting could be a catalyst, especially if the central bank appears particularly hawkish.
“We have grown by over 30% in 2019, over 18% last year and over 21% in the first few months of this year,” Donabedian said. “These are unsustainable rates or returns.… Our conclusion is that it’s going to get more difficult from here on. The valuations are somewhat extended and this whole incredibly favorable policy framework is going to become a little less friendly.”
Watch the Congress now
Donabedian said it will be important to monitor discussions in Congress as he begins to give details of infrastructure spending and the type of tax increases that will be proposed to pay for it.
“They are going to start filling in the blanks as to where the money will be spent and what taxes and tax rates will be written into the legislation,” 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 business issues. investors. “
He said the market ignored the tax issue. “These kinds of issues have calmed down over the summer, but it’s back in full swing over the next couple of weeks. It will get a lot of attention.”
The tax rulings could have big implications for corporate profits, which have been a major driver of stock market gains. “A very straightforward way that could go wrong is if you get a lot of tax increases that will take effect in 2022. It’s a straightforward haircut,” he said.
Calendar for the upcoming week
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 applications
8:30 am Import price
8:30 am Empire State Manufacturing
9:15 am Industrial production
Thursday
8:30 am Unemployment claims
8:30 a.m. Philadelphia Fed Poll
8:30 am Retail sales
4:00 p.m. ICT data
Friday
10:00 am Consumer sentiment
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