Product prices as seen in Walmart.
Available: Walmart
Tuesday’s news was good for inflation, and investors are hoping for better news Wednesday when the Labor Department releases its July consumer price index report.
With the score being one down, one will continue to confirm that the jump early in the year in prices is either a fluke or a last gasp of inflation, a positive CPI reading could mean that the Federal Reserve can turn its view to other economic challenges. , such as a sluggish labor market.
“At this point, the inflationary pressures that we saw building have really dissipated,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “Inflation is almost a nonissue at this point. There is a broad expectation that the worst is easily behind us.”
Like others on Wall Street, Baird expects the Fed in September to shift its focus from a tight policy to tackle inflation to a more dovish stance to reduce the potential in the jobs picture.
While consumers and business owners continue to express their concerns about high prices, the trend has indeed changed. Tuesday’s producer price index, or PPI, report for July helped confirm optimism that inflation figures to start in 2021 and rise again in early 2024 are in the rearview mirror.
The PPI report, which is seen as a measure of wholesale inflation, showed prices were just 0.2% in July and about 2.2% from a year ago. The number is now very close to the Fed’s 2% target and indicates that the market impulse for the central bank to start cutting rates is roughly on target.
Economists surveyed by Dow Jones expected the CPI to also show a 0.2% increase in the reading of all items and core measurements excluding food and energy. Instead, they are expected to show 12-month rates of 3% and 3.2% — lower than in mid-2022 but still far from the Fed’s 2% target.
Still, investors are looking to the Fed at its September meeting to start cutting interest rates, given that inflation is weakening and so is the labor market. The unemployment rate has now risen to 4.3%, an increase of 0.8 percentage points over the past year that has raised the time-tested recession flag known as the Sahm Rule.
“Given the focus on the relative weakness in the labor market, given the fact that inflation is falling rapidly, and I expect it to continue in the next few months, it would be surprising if the Fed doesn’t start moving towards easing. very soon, maybe at the September meeting,” said Baird . “If not at the September meeting, the market will not take kindly to that.”
Worried about Fed’s slow response
The brief pickup in weekly initial jobless claims, combined with other weakening economic metrics, briefly had some in the market looking for an emergency rate cut.
While that sentiment has dissipated, there are still concerns about the Fed slowing down, as it slowly tightens as inflation begins to rise.
Another light inflation report “makes the Fed comfortable that it can shift its focus away from inflation and onto employment,” said Tom Porcelli, chief U.S. economist at PGIM Fixed Income. “They were able to shift their attention from inflation to employment … last month. There were cracks in the background of the labor market.”
Amid the twin realities of falling inflation and rising unemployment, markets are pricing in the certainty of a rate cut at the September 17-18 Fed meeting, with the only question being how much. Futures prices are roughly split between a quarter or half cut, and lean heavily toward the possibility of a full percentage point cut by the end of the year, according to CME Group calculations.
However, futures prices have been very high this year. Traders started the year expecting a quick cut, then reverted to expecting just one or two before the latest swing in the other direction.
“I’m as interested in the inflation report (Wednesday) as everyone else, but I think it will take a real outlier to change the Fed’s tune from 1) moving to employment as a focus, and 2) seriously thinking about cutting in September,” Porcelli said. “They need to start aggressively. I could easily make an argument for the Fed to cut 50 basis points just to start things off because I think they should have already cut. I don’t think that’s what they’re going to do. start modestly.”
