Inside Markets — Hiking Cycle Outlook

This morning’s CPI print mostly supports the disinflation theme and keeps the focus on the outlook for the Fed’s hiking cycle. July headline and core CPI both rose +0.2% MoM, which was inline with consensus, but the YoY headline number came in at +3.2% vs. expectations for +3.3% and an inline YoY core rate of +4.7% was down from +4.8% in June. The disinflation theme also includes an eventual decline in shelter prices. Shelter remains the biggest single contributor to overall inflation, accounting for 90% of the MoM uptick in July headline inflation. A recent report from the San Francisco Fed forecasts shelter prices to slow meaningfully in coming months.

Results from DIS usually mark the unofficial end of earnings season with investors turning their attention to companies that report off the calendar cycle. These reports give investors a look at business trends from the most recent month with next week heavy on consumer-facing companies. HD reports earnings on Tuesday morning, TGT/TJX Wednesday morning and WMT on Thursday morning. Next week also includes a number of reports from the Tech sector including CSCO, SNPS, WOLF on Wednesday afternoon, AMAT, BILL, KEYS Thursday afternoon and PANW Friday afternoon.  

We continue to expect a brief period of weakness for the S&P 500 (SPX) based on ongoing policy ambiguity during a relative catalyst vacuum.  The Fed’s Jackson Hole Summit from August 24-26 will be the last major catalyst before attendance picks up in the second week of September. Today’s inline CPI report will likely keep the Fed from announcing the end of its hiking cycle at Jackson Hole, preferring to retain its optionality as long as possible.  We’ve been thinking the September 20 FOMC meeting would be best place for the Fed to officially end its hiking cycle, making the August Jobs Report on 9/1 and August CPI report on 9/13 the most important near-term catalysts.  An end to the hiking cycle would be a bullish development for the bond market as yields fall and the curve twists steeper.  Bullish curve steepening is generally considered bullish for equities as well given its tendency to result in higher valuation multiples.