Inflation Sets the Scene for the Fed: What to know this week

The week ahead will be all about inflation.

Tuesday morning will bring investors the closely-watched Consumer Price Index (CPI) for August, which will likely solidify in investors’ minds whether the Federal Reserve raises interest rates by 0.50% or 0.75% at its policy meeting later this month.

Economists surveyed by Bloomberg expected headline CPI rose 8.1% over the prior year in August, a moderation from 8.5% increase seen in July. On a month-over-month basis, CPI is expected to show prices fell 0.1% from July to August, primarily due to continued easing in energy prices. If realized, this would mark the first monthly decline since May 2020.

Core CPI, which strips out the volatile food and energy components of the report and is closely tracked by the Fed, is likely to have inched higher in August, rising 6.1% over the same month last year, more than the 5.9% year-on-year increase seen in July.

“In the run-up to the Fed’s next policy announcement on September 21, the release of August’s consumer price data could still be pivotal in determining whether the Fed will follow the European Central Bank and Bank of Canada with a 75 basis point hike or opt instead for a smaller 50 basis points,” Capital Economics Chief U.S. Economist Paul Ashworth wrote in a note.

Markets will also closely track Wednesday’s Producer Price Index (PPI), a reading on inflation from the production side of the economy.

PPI — which measures the change in the prices paid to U.S. producers of goods and services — is also expected to have cooled on an annual basis last month, rising 8.9% in August, down from 9.8% in July. The month-over-month headline reading is expected to fall for a second-straight month, dropping 0.1% in August after a 0.5% decline in July.

U.S. stocks enjoyed a broad-based rally last week, logging weekly gains for the first time in three weeks. The S&P 500 and Nasdaq both rose more than 4% during the holiday-shortened week, while the Dow rose 3.2%.

Despite some signs inflation is abating, Federal Reserve officials have acknowledged continued tightening is likely needed to restore price stability to the central bank’s target rate.

“While the moderation in monthly inflation is welcome, it will be necessary to see several months of low monthly inflation readings to be confident that inflation is moving back down to 2 percent,” Federal Reserve Vice Chair Lael Brainard said Wednesday during a speech in New York.

“Monetary policy will need to be restrictive for some time to provide confidence that inflation is moving down to target,” she said, adding: “We are in this for as long as it takes to get inflation down.”

While some market participants remain hopeful that a cooler-than-expected August CPI figure may still sway the Fed toward a half-point interest rate hike this month, much of Wall Street appears convinced a third-straight 0.75% increase is on tap.

Economists at Bank of America, Goldman Sachs, and Nomura all upwardly revised their projections last week to 75 basis points in September from previous forecasts for a half percentage-point hike.

“In our view, unchanged guidance about when the pace of rate hikes may slow suggests that Chair Powell and the Fed are comfortable with current market pricing,” Bank of America’s chief U.S. economist Michael Gapen wrote in a note to clients. “We strongly believe that history suggests that the Fed is willing to surprise financial markets when it comes to policy rate cuts but not when it comes to rate hikes.”

Fedspeak will hit a pause in the week ahead as central bankers enter a blackout period ahead of their policy-setting meeting Sept. 20-21.

Outside of inflation data, investors will also get a gauge of consumer spending when the Commerce Department releases its monthly retail sales report for August on Thursday. Economists expect the headline figure was flat during the month, while sales excluding autos and gas likely rose 0.8%, according to Bloomberg estimates.

Things will be quiet on the earnings front in coming days, but some reports are still due out from companies, notably Oracle (ORCL) and Adobe (ADBE).

Some major corporate events are on the calendar next week, including Starbucks’ (SBUX) investor day and the Goldman Sachs Communacopia + Technology Conference.

Skybridge Capital and Anthony Scaramucci’s hedge fund confab SALT will also take place in New York on the heels of a deal by Sam Bankman-Fried’s FTX Ventures to acquire a 30% stake in SkyBridge.

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Economic Calendar

Monday: No notable reports scheduled for release.

Tuesday: NFIB Small Business Optimism, August (90.0 expected, 89.9 during prior month); Consumer Price Index, month-over-month, August (-0.1% expected, 1.3% during prior month); CPI excluding food and energy, month-over-month, August (0.3% expected, 0.3% during prior month); CPI, year-over-year, August (8.1% expected, 8.5% during prior month); CPI excluding food and energy, year-over-year, August (6.1% expected, 5.9% during prior month)

Wednesday: MBA Mortgage Applications, week ended September 9 (-0.8% during prior week); PPI final demand, month-over-month, August (-0.1% expected, -0.5% during prior month); PPI excluding food and energy, month-over-month, August (0.3% expected, 0.1% during prior month); PPI final demand, year-over-year, August (8.8% expected, 9.8% during prior month); PPI excluding food and energy, year-over-year, August (7.1% expected, 7.6% during prior month)

Thursday: Initial jobless claims, week ended September 10 (227,000 expected, 222,000 during prior week); Continuing claims, week ended September 3 (1.478 million expected, 1.473 during prior week); Empire Manufacturing, September (-15.0 expected, -31.3 during prior month); Retail Sales, month-over-month, August (0.0% expected, 0.0% during prior month); Retail Sales excluding autos, month-over-month, August (0.1% expected, 0.4% during prior month); Retail Sales excluding autos and gas, month-over-month, August (0.8% expected, 0.7% during prior month); Philadelphia Fed Business Outlook, September (3.0 expected, 6.2 during prior month); Import Price Index, month-over-month, August (-1.2% expected, -1.4% during prior month); Export Price Index, month-over-month, August (-1.1% expected, -3.3% during prior month); Industrial Production, month-over-month, August (0.1% expected, 0.6% during prior month); Capacity Utilization, August (-0.1% expected, 0.7% during prior month); Manufacturing (SIC) Production, August (-0.1% expected, 0.7% during prior month); Business Inventories, July (0.6% expected, 1.4% during prior month)