CPI inflation and retail sales data this week should further calm recession fears that tripped up the S&P 500 at the start of the month. However, markets may have further to go in reeling in odds for a half-point Federal Reserve rate cut at the Sept. 18 meeting.
"The U.S. economy is doing just fine," wrote Torsten Slok, Apollo Global Management chief economist, after last week's data, showing solid service-sector activity and a retreat in jobless claims after a Hurricane Beryl-related jump.
Slok highlighted "steady growth in daily and weekly data for restaurant bookings, air travel, hotel bookings, credit card data, bank lending, Broadway show attendance, box office grosses, and weekly data for bankruptcy filings trending lower."
CPI Inflation
Economists expect a modest 0.2% monthly increase for both the overall consumer price index in July and the core CPI, excluding food and energy, according to Econoday. That would keep the 12-month CPI inflation rate at 3%, while core inflation eases to 3.2%, the lowest since April 2021.
Yet forecasts for the monthly increase in prices range widely, from 0.1% to 0.3% for the core CPI, so there's scope for either an upside or downside surprise.
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Nomura economists see a downside surprise as more likely, projecting a 0.08% rise in core prices, following June's tame 0.065% increase. "We expect core goods and travel-related service prices fell for the fourth consecutive month," Nomura senior economist Aichi Amemiya and colleagues wrote in a preview. Leading indicators also suggest the disinflationary trend in housing should continue through the end of the year.
However, Ian Shepherdson, chief economist at Pantheon Macroeconomics, expects an in-line 0.2% rise for the core CPI. "A spate of entertainment providers hiked prices in July, including cable TV network Spectrum, as well as Paramount and Spotify." The cost of mailing a letter also jumped by 7.4% in July, he adds.
PPI Inflation
The producer price index, out Tuesday at 8:30 a.m., also may influence the Fed rate-cut outlook. The Fed's primary inflation rate, the core PCE price index, gets about 30% of its inputs from the PPI and 70% from the CPI, based on weightings.
Health care services prices come from the PPI, which includes prices paid by third parties, not just out-of-pocket payments like the CPI.
Economists expect the overall and core PPI rose 0.2% in July. Pantheon's Shepherdson sees potential for a tamer 0.1% rise. He sees June's surprising 1.9% jump in margins received by wholesalers may partially unwind.
Retail Sales Report
Retail sales, out Thursday at 8:30 a.m. ET, are forecast to grow 0.3% on the month, but just 0.1% excluding autos. Yet Nomura expects a 0.7% rise in overall sales, with Amazon Prime Day and competing sales providing a tailwind.
On Friday, the CNBC/NRF Retail Monitor reported a 0.74% rise in retail sales, excluding autos and gas, vs. June, on a seasonally adjusted basis. The report, based on credit and debit card purchase data, showed online and other nonstore sales up 0.8% and sales at general merchandise stores rising a strong 1.75%.
However, the data seems a bit at odds with Amazon offering a softer-than-expected sales outlook on Aug. 1 amid signs of consumer caution.
On Thursday, investors also will get July industrial production. Notably, they will also get weekly jobless claims as well as as August regional manufacturing reports from the Philadelphia Fed and New York Fed, as well the August Housing Market Index.
Fed Rate-Cut Outlook
As of early Monday, markets are pricing in roughly 50-50 odds of a half-point Fed rate cut at the Sept. 18 meeting, according to CME Group's FedWatch page. Further, markets are pricing in 72% odds of a full point in rate cuts by the end of the year.
With just three Fed meetings left this year, markets are indicating a strong likelihood of a half-point rate cut at one of the meetings, with quarter-point moves at the other two.
Yet the bar to a 50-basis-point move is high. It probably won't happen unless last week's brief brush with financial market instability returns or the signs of an economic slowdown become more pronounced. Here's a big reason why: BofA Global Research wrote last week that a 50-basis-point cut would likely spell the end of Fed balance-sheet shrinkage, also known as quantitative tightening or QT.
QT can continue if the Fed is just easing up on the restrictiveness of policy with quarter-point moves. Yet "the QT will likely stop" if the Fed has to resort to a bigger cut to stimulate the economy, the BofA team led by Mark Cabana wrote.
Fed chair Jerome Powell's Aug. 24 speech at the Kansas City Fed's annual gathering in Jackson Hole, Wyo., could offer signals of how the coming rate-cutting cycle will proceed.
S&P 500
The S&P 500 rose 0.5% on Friday, nearly wiping out its loss for the week, despite Monday's 3% dive. Still, the S&P 500 finished in the red for a fourth-straight week. The S&P 500 now sits 5.7% off its July 16 record closing high.
Despite the recovery to date, investors should still await a follow-through day before turning more aggressive.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
