The numbers could change the calculus for the Federal Reserve, which is guaranteed to raise interest rates again at its next policy meeting on September 21. The question is, by how much?
But could the odds of another huge rate hike edge lower if inflation data continues to suggest that “price stability” might finally be closer to reality? The consumer price index (CPI) numbers come out Tuesday morning while producer price index (PPI) figures will be released Wednesday.
Economists are currently forecasting that consumer prices for August will fall slightly from July and that prices were up 8.1% over the past 12 months. Of course, 8.1% is still incredibly high by historical standards but it would be a notable slowdown from June’s 9.1% year-over-year spike in prices.
“We probably have seen the peak on inflation. Food and energy prices are coming down. There is more room to the downside,” said Joe Kalish, chief global macro strategist with Ned Davis Research.
Investors seem to begrudgingly accept the likelihood that the Fed will raise rates by 75 basis points again in a few weeks…regardless of what the August inflation data indicates.
But traders are hoping that the September rate hike is the last one of such magnitude. Assuming the Fed boosts rates by three-quarters of a point on September 21, that would bring interest rates to a target range of 3% to 3.25%.
Look at fed funds futures on the CME for November. As of midday Friday, investors were pricing in 70% odds of a half-point hike at the Fed’s November 2 meeting … to a range of 3.5% to 3.75%.
There was just a 10% probability of a fourth straight 75 basis point increase, however, which could be one reason why stocks have rebounded so far in September following their August tumble.
Price increases slowing and consumers still spending
Wall Street is clearly betting that inflation trends will continue to head in the right direction. Economists also expect producer prices, the cost of goods at the wholesale level, to fall slightly in August. Forecasts are for a drop of 0.1% from July to August, following a 0.5% decrease from June to July.
Producer prices surged 9.8% year-over-year in July but that’s down from June’s high water mark of 11.3%. Any further slowdown would likely be welcomed by the market, the Fed and consumers.
That brings us to retail sales. Consumer spending figures for August are due out Thursday morning. The government reported last month that retail sales were up 10.3% year-over-year in July. It will be interesting to see if that rate of sales picked up in August or slowed down.
And that is the key point. Investors have to pay closer attention to the inflation data than whatever Powell or other Fed members are saying. The Fed remains data dependent, which is why rate hike odds are constantly in flux.
“There must be a convincing downward trend in inflation. We are not there yet,” said David Donabedian, chief investment officer of CIBC Private Wealth US, in a report Friday.
Big techs on tap
Shares of both companies have fallen this year, along with the rest of the tech sector and broader market. Oracle is down nearly 15% while Adobe has plunged more than 30%.
But analysts expect solid sales growth from both companies … nearly 15% for Adobe from a year ago and an almost 20% increase from Oracle.
One investment strategist said that big tech firms like Oracle and Adobe make sense for investors.
“We do own big techs that are much more mature and established,” said Suzanne Hutchins, head of the real returns strategy and senior portfolio manager with Newton Investment Management.
“Both companies generate more than 40% of sales outside the US,” Morgan noted in a report.
Monday: China markets closed; earnings from Oracle
Wednesday: US PPI
Thursday: US retail sales; US weekly jobless claims; meeting between Russia’s Vladimir Putin and China’s Xi Jinping; earnings from Adobe
Friday: US U. of Michigan consumer sentiment; China retail sales, unemployment and other economic data