These days, investors are paying close attention to any reading about inflation and the consumer price index will be the big one to watch over the coming week.
The latest snapshot of the economy comes just a week before the important September meeting of the Federal Reserve. At this meeting, the Fed is expected to discuss more details about its plan to reduce its bond-buying program or quantitative easing.
Market professionals say a more inflated reading of inflation could accelerate the Fed’s plans to slow the $ 120 billion a month in bond purchases. Recovering from its asset purchase program would be the Fed’s first major step toward moving away from the easy policy it put in place to combat the pandemic.
The consumer price index is expected on Tuesday and retail sales data released on Thursday. According to the consensus estimate by FactSet, consumer prices are expected to jump at an annual rate of 5.3% in August, while the consumer continued to decline from the high levels of spending at the beginning of the year.
Hot CPI
“If the CPI is higher than expected, it could make the difference between a September announcement to shrink or wait until November,” said Peter Boockvar, investment director at Bleakley Advisory Group.
Economists expect the CPI to rise at a rate of 0.4% month-on-month. The report comes after the August production price index, released on Friday, showed a jump of 8.3% year-on-year, due in part to supply chain restrictions.
The Fed’s formal announcement of a reduction in its bond-buying program, also called QE, is widely expected in November or December. Many who had waited for a September announcement pushed back their time period to the end of the year after the August employment report showed only 235,000 jobs added, some 500,000 less than expected.
“The trend has certainly been for the number of inflation to exceed expectations. I think if that happens again, it will feed the narrative that high inflation will continue. Obviously, it’s a problem for the bond market if it is seen at all as accelerating the time of QE reduction or accelerating the time of the first rate hike, “said David Donabedian, CIBC Private Wealth’s U.S. investment director. That would be negative for the actions.
“If markets present an inflation riot here and as a result there is volatility, they could move it through September,” Donabedian said of the Fed’s reduced announcement. “But I think there’s a one in four probability in my opinion.”
Stagflation?
This combination of higher inflation and slower spending, especially after the weaker jobs report in August, has stimulated discussion about the threat of stagflation. These concerns have also risen as economists push third-quarter growth forecasts to a still-high level, above 5%, from 6%.
“I have more to do with the ‘flation’ side than the ‘deer’ side. I think the economy will perform well until next year,” Donabedian said. He said the slowdown in consumer spending after stimulus checks had boosted retail sales earlier this year is not surprising and may just be a “short-term warning”.
“We had this explosive growth in retail sales earlier this year as a direct result of the stimulus of payments and vaccines and an explosion of consumer optimism. It has really been resolved now,” he said. to say. “There was a lot of liquidity and savings, and they spent what they spent with that extra amount of savings and you’re going through a bit of a setback here, so you see the economists mark their third quarter estimates. of the consumer are pretty good. “
Barclays U.S. economist Michael Gapen said he expects the CPI report to show that inflation is peaking, the Fed said. But he says the downward trend is not just a problem for consumer spending. It also appears in business and housing spending.
“With the labor markets where it is, August was a bit of an egg. But employment growth has been solid on average, very robust over the year,” he said. “Even though employment disappointed in August, hours and earnings were still pretty good. There is revenue that consumers can spend. We are looking at it as a short-term hiccup.”
Gapen said third-quarter economic growth may be slightly slower than expected. However, he said some of the lost growth could appear in the fourth quarter.
“It has some characteristics of stagflation, but the real stagflation is increasing unemployment and increasing inflation. We don’t have it,” he said. “These are bottlenecks that limit the pace of recovery and lead to higher inflation. Demand is not the problem right now. Supply is. The unemployment rate continues to fall and employment is improving. .He’s eager, 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 how they see problems with supplies extending to 2022. Donabedian expects to see more warnings ahead of the third-quarter profit season.
Shares were lower this week, with the S&P 500 losing 1.7% to 4,458. The three-year Treasury yield, followed closely, remained above 1.3% and stood at 1.33% on Friday.
Several strategists expect to see the stock market retreat during the typically turbulent periods of September and October. Some say the September Fed meeting could be a catalyst, especially if the central bank sounds especially deficient.
“We increased by more than 30% in 2019, more than 18% last year and more than 21% in the first months of this year,” Donabedian said. “They’re unsustainable rates or profitability … Our takeaway is that it’s going to be harder from here. The ratings are expanding a little bit and this whole incredibly supportive policy framework will be a little less friendly.”
Now look at Congress
Donabedian said it will be important to see discussions in Congress as he begins to put details on infrastructure spending and what kind of tax increases will be proposed to pay for it.
“They will start filling in the blanks about where the money will be spent and what taxes and types of taxes will be written into the legislation,” he said. “It’s the overall corporate tax rate, it’s the foreign income tax, the capital gains rate and the dividend tax rate. These are issues related to large investors.”
He said the market has been ignoring the tax issue. “These kinds of issues kept quiet over the summer, but it’s been completely boring again for the next two weeks. It’s going to get a lot of attention.”
Tax decisions could have major implications for corporate profits, which have been a major driver of stock market profits. “A very direct way that could go wrong is if you get a big set of tax increases that will go into effect in 2022. That’s a direct haircut,” he said.
Next week’s calendar
Monday
Earnings: Oracle
2:00 pm Declaration of the federal budget
Tuesday
6:00 am NFIB small business sindex
8:30 am IPC
Wednesday
7:30 am Weekly mortgage applications
8:30 am Import prices
8:30 a.m. Empire State Building
9:15 h Industrial production
Thursday
8:30 am Unemployment claims
8:30 a.m. Philadelphia Fed Survey
8:30 am Retail sales
16:00 ICT data
Friday
10:00 h Consumer sentiment