CPI Print is Key for Markets

This week’s CPI print is a major catalyst for US markets, one that will set the stage for the Federal Reserve’s actions into year end and 2023. To stay up to date on current market catalysts, sign up to receive Morning Notes.

Setting the Stage

Markets have reacted negatively to a year plagued by high inflation, the Russia/Ukraine conflict and European energy crisis. The S&P 500 and the tech heavy Nasdaq composite and down big year to date. The Fed’s fight to curb rising inflation by raising interest rates has been a key driver of markets this year. Fed Chair Powell, at his August 26th Jackson Hole address, vowed to aggressively fight inflation by raising rates until inflation returns to their target rate of ~2%. July’s CPI print was softer than expected, but still far from the Fed’s target, with US headline inflation at 8.5%.

What’s Next

August’s CPI report will be released tomorrow and indicate whether inflation is headed in the right direction. In the near term, a 75 basis point rate hike is the expectation for the September FOMC meeting and markets have priced in a terminal Fed Fund rate of nearly 4% which is well above the supposed neutral rate of 2.5%. Terminal rate expectations have been a driving force behind every rally and sell-off since April.

Why Does the CPI Print Matter?

A cyclical recovery narrative would likely require multiple CPI results exhibiting lower realized inflation. A lower than expected CPI number tomorrow would add credibility to the peak inflation theme that followed July’s softer than expected print.