Markets brace for key inflation data next week.  Analysts say they expect a "reflex" gain if the CPI falls, but don't bet on the Fed to pivot at its next meeting.

Markets brace for key inflation data next week. Analysts say they expect a “reflex” gain if the CPI falls, but don’t bet on the Fed to pivot at its next meeting.

  • Cooling inflation in August could fuel hopes that the Fed will scale back its next rate hike.
  • Headline inflation could ease to a still-warm 8.1%, and equities could rebound if below.
  • But the Fed still has a long way to go to bring inflation back to the 2% target.

The upcoming U.S. inflation report is expected to show further signs of a slowdown in consumer prices, data that could provide near-term upside for a stock market still vulnerable to downside pressures, analysts said. market.

This week, some investment banks upgraded their rate hike forecasts for Federal Open Market Committee meetings in September and November. Among them, Bank of America now expects a 75 basis point fed funds rate hike in September and a 50 basis point move in November, compared to its previous expectations of 50 and 25 basis points. , respectively. He also added a forecast for a January rate hike of 25 basis points.

“While we are moving to a 75 basis point rate hike in September, we recognize that there are risks to a lower 50 basis point hike,” BofA said in a note released Thursday. In one risk, “next week’s consumer price index report could surprise on the downside, opening the door for a more modest upside,” he said.

The Labor Department’s August inflation report is due Tuesday with a consensus call among economists that puts headline inflation at 8.1%. That rate would mark a drop from 8.5% in July and 9.1% in June, which was the highest in 41 years.

“The gut reaction would be very positive for stocks,” Edward Moya, senior market analyst at Oanda, told Insider. “You’re going to see a lot of investors anticipating that the Fed’s job of raising rates could be done much sooner.”

Investors expect the Fed to make a third consecutive rate hike of 75 basis points this month to help bring inflation back towards its 2% target. The Fed has raised rates four times this year within a range of 2.25% to 2.5%.

A drop in gasoline prices helped dampen inflation in July, and gasoline prices have since continued to decline. The average gasoline price in the United States was $3.78 a gallon on Friday, according to the AAA auto club, up from $4.03 a month ago.

While lower gas prices are helping, Moya said ongoing supply chain issues and high housing and power costs could prove headstrong for the Fed.

“I think we’re going to see a lot of that inflation is sticky. Some of that inflation is going to fight back. The Fed’s job won’t be done by the end of the year and the market is going to have some problems And risk appetite is going to struggle over the next few months,” Moya said.

A drop in used car prices could contribute to an overall drop in the consumer price reading in August, Wayne Wicker, chief investment officer at MissionSquare Retirement, told Insider.

“Month to month we are going to start to see some negative numbers coming in and with that inflation expectations should come down quite dramatically. But I think there will be a lag between the actual data which happen and politics,” he said.

“Powell is still pretty adamant that until inflation gets closer to that two, two and a half percent range, they’re going to be pretty vigilant,” Wicker said. “While I think there will be some short-term relief in equity markets if we see this further deceleration in inflation, we will again have concerns with Fed tightening. We are not fired. business and it’s not going to stop anytime soon.”

Wicker said he expects the Fed to raise the federal funds rate by three-quarters of a percentage point at the Sept. 20-21 meeting.

Goldman Sachs and Barclays also raised their rate hike forecasts to 75 basis points for September and 50 basis points for November. Barclays said it now sees only an “outside chance” that weaker-than-expected August inflation figures will swing the pendulum back towards a 50 basis point increase at the September FOMC meeting.

The probability of a 75 basis point hike in September rose to 86% on Friday from 57% a week earlier, according to the CME tool FedWatch.

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