A spate of US jobs data this week left investors puzzled over the future course of Federal Reserve monetary policy, but next week’s CPI report for June could give the stock market more clarity on whether the Fed will continue its fight against inflation thereafter needs to step up Last month, the country paused its aggressive streak of rate hikes.
The June CPI report, due to be released Wednesday at 8:30am ET, could either give the green light for a prolonged stock market rally or nullify the current baby bull market as macro headwinds intensify and could potentially stall the rally, said market analysts.
The June CPI from the Bureau of Labor Statistics, which measures changes in the prices consumers pay for goods and services, is expected to show a 3.1% year-on-year increase, up from a 4% year-on-year increase Year-on-year slowdown in the previous month according to a Dow Jones economist survey. The core price, which discounts fluctuating food and fuel costs, is expected to rise 5.0% yoy, up from 5.3% in May.
Tony Roth, chief investment officer at Wilmington Trust, said his team expects disinflation to continue in June, particularly what is known as super-core inflation, excluding energy, food and housing costs, which is falling at a slower rate than the broader one Scale.
“We expect significant moderation in headline inflation to continue, and that should add to the narrative that the Fed is nearing its end,” Roth told MarketWatch on Friday. “If it’s the worst case scenario – two more raises, that will also add to the narrative that two more raises can achieve their goal.”
However, for the stock market, which is currently being driven by “optimistic sentiment” and “excessive cash holdings”, it is difficult to continue the rally because “how can you be surprised from above when you have already priced in a lot of good news?”, said Irene Tunkel, chief strategist for US equity strategy at BCA Research.
“From here, the stock market is more likely to fall than rise, because once you don’t get as many upside surprises as you used to, then the stock market is more likely to go down [in CPI data as you priced in]”It’s really easy for the market to collapse,” Tunkel said.
Overly optimistic sentiment, elevated technology company valuations and improving economic expectations are fertile ground for stock market disappointments, especially when monetary policy is tight, Tunkel said. “It’s just too early to celebrate the win,” she said.
See: Here’s what stock market investors — and probably the Fed as well — don’t like about the June jobs report
The US stock market has shifted from fears of a “hard landing” in the first half of 2023 to hopes of a “soft landing” in the second half after the Fed decided in June to leave interest rates unchanged at 5% to 5.25 % to leave. However, Fed Chair Jerome Powell warned that policymakers still expect more rate hikes this year to fight inflation, with some forecasting two more quarter-point hikes in the second half of 2023.
Investors had to weigh a mixed bag of economic data this week. US stocks suffered significant losses on Thursday after data showed the private sector added nearly half a million jobs in June, leading to yields on government bonds
TMUBMUSD10Y is rising, raising fears of more Fed rate hikes as the labor market is still too tight for the central bank to ease monetary tightening.
But a day later, a still strong but weaker-than-expected June non-farm payrolls report has drawn some momentum from the previously surprisingly resilient job market, leaving investors divided on whether the results are strong enough to warrant policymakers to force an increase Interest rates are higher than expected and there is a risk that the economy will slide into recession.
According to the CME FedWatch Tool, Fed fund futures traders have priced in over a 92% chance that the Fed will hike interest rates by 25 basis points later this month to a range of 5.25% to 5.5%. Meanwhile, expectations for another quarter-point rise in September or November eased somewhat on Friday but remained above 25%.
David Lefkowitz, head of equities Americas at UBS Global Wealth Management, said the “overall tone” of the jobs data was that the US economy remains resilient. “A big hit against the ADP and a small miss against the government jobs report — the overall picture here is that the U.S. economy remains more resilient than markets were expecting a few months ago,” he told MarketWatch in a phone interview on Friday .
However, Wilmington Trust’s Roth believes that Friday’s report shows a “strong reversal in the labor market” and that there is no reason to think the Fed needs to keep rates higher for that long, just that this is “very orthogonal” to the Fed’s tightening stance in the second half of the year, which includes further rate hikes.
“What I would describe now is that any further rate hikes are ‘insurance hikes'” so the Fed can do its job against inflation, Roth said.
See: According to hedge fund traders, markets are caught in a “self-defeating feedback loop” with the Fed on inflation
Lefkowitz noted that it’s important for investors to see interest rate movements in the context of “what else is going on in the economy.” Interest rate moves so far in 2023 are mainly due to “better economic growth prospects” than inflationary pressures, he said. According to Lefkowitz, 2023 also offers a better environment for corporate earnings growth, which could improve significantly compared to the second half of 2022 as corporate forecasts have increased over the past three months.
But BCA Research’s Tunkel said it is the “conundrum” between economic growth and inflation that is confusing the current economic picture.
“The economy will have a very long way to go from very strong growth, and since interest rates are not restrictive enough, that path is getting longer and longer,” Tunkel said on the phone. “That’s the conundrum, because if we have strong growth, inflation is unlikely to fall because growth and inflation are closely linked – they move in lockstep.”
US stocks ended the week lower, with the Dow Jones Industrial Average DJIA posting its biggest weekly decline since March. The Dow is down nearly 2% this week, the S&P 500 SPX is down 1.2% and the Nasdaq Composite COMP is down 0.9%, according to Dow Jones Market Data.