Inflation sets the stage for the Fed: What to know this week

Next week will be all about inflation.

Tuesday morning will bring investors the closely watched consumer price index (CPI) for August, which is likely to be cemented in investors’ minds whether the Federal Reserve raises interest rates by 0.50% or 0.75% at its policy meeting on -late this month.

Economists polled by Bloomberg had expected core CPI to rise 8.1% from a year earlier in August, a moderation from the 8.5% increase seen in July. On a monthly basis, the CPI is expected to show a 0.1% drop in prices from July to August, mainly due to the continued decline in energy prices. If realized, it would mark the first monthly decline since May 2020.

The core consumer price index, which strips out the volatile food and energy components of the report and is closely watched by the Fed, was likely to rise in August, rising 6.1% from the same month last year, up from 5.9% on a year-over-year basis – an annual increase seen in July.

“Ahead of the Fed’s next policy announcement on Sept. 21, the release of August consumer price data could still be key in determining whether the Fed follows the European Central Bank and the Bank of Canada with a 75 basis point hike or chooses instead of a smaller 50 basis points,” Capital Economics chief U.S. economist Paul Ashworth wrote in a note.

Markets will also be closely watching Wednesday’s producer price index (PPI), a gauge of inflation on the manufacturing side of the economy.

The PPI, which measures the change in prices paid to US producers of goods and services, was also expected to cool year-on-year last month, rising 8.9% in August, down from 9.8% in July . The monthly headline is expected to decline for a second month in a row, falling 0.1% in August after a 0.5% drop in July.

US stocks enjoyed a broad rally last week, posting weekly gains for the first time in three weeks. The S&P 500 and Nasdaq rose more than 4 percent during the holiday-shortened week, while the Dow rose 3.2 percent.

Despite some signs that inflation is easing, Federal Reserve officials acknowledged that continued tightening is likely needed to restore price stability to the central bank’s target interest rate.

Federal Reserve Board Governor Leyl Brainard testifies before a Senate Banking Committee hearing on her nomination to be vice chairman of the Federal Reserve, on Capitol Hill in Washington, U.S., January 13, 2022. REUTERS/Elizabeth Frantz

Federal Reserve Board Governor Leyl Brainard testifies before a Senate Banking Committee hearing on her nomination to be vice chairman of the Federal Reserve, on Capitol Hill in Washington, U.S., January 13, 2022. REUTERS/Elizabeth Frantz

“While moderation in monthly inflation is welcome, we will need to see several months of low monthly inflation to ensure inflation moves back to 2 percent,” Federal Reserve Vice Chairman Lael Brainard said Wednesday during a speech in New York.

“Monetary policy will need to be tight for a while to provide confidence that inflation is moving towards the target,” she said, adding: “We’re in it for as long as it takes to get inflation down.”

While some market participants remain hopeful that August’s lower-than-expected CPI reading could still prompt the Fed to raise interest rates by half a point this month, much of Wall Street appears convinced that a third consecutive an increase of 0.75% is available.

Economists at Bank of America, Goldman Sachs and Nomura all revised their forecasts upwards last week to 75 basis points in September from previous forecasts for a half percentage point increase.

“In our view, unchanged guidance on when the pace of rate hikes may slow suggests that Chairman Powell and the Fed are comfortable with current market prices,” Bank of America Chief Economist Michael Gapen wrote in a note to clients. “We strongly believe that history shows that the Fed is willing to surprise financial markets when it comes to cutting interest rates, but not when it comes to raising interest rates.”

Fedspeak will pause next week as central bankers enter a hiatus before their September 20-21 policy meeting.

Outside of the inflation data, investors will also get a measure of consumer spending when the Commerce Department releases its monthly retail sales report for August on Thursday. Economists expect the headline figure to be unchanged for the month, while sales excluding autos and gasoline likely rose 0.8 percent, according to Bloomberg estimates.

Things on the earnings side will calm down in the coming days, but some reports are still expected from companies, notably Oracle (ORCL) and Adobe (ADBE).

Some big corporate events are on the calendar next week, including Starbucks’ (SBUX) investor day and the Goldman Sachs Communacopia + technology conference.

Skybridge Capital and Anthony Scaramucci’s hedge fund SALT Confab will also be held in New York on the heels of Sam Bankman-Fried’s FTX Ventures deal for acquires a 30% stake in SkyBridge.

Economic calendar

monday: There are no notable reports scheduled for publication.

Tuesday: NFIB Small Business OptimismAugust (90.0 expected, 89.9 in previous month); Consumer Price Index, month by monthAugust (-0.1% expected, 1.3% in the previous month); CPI excluding food and energymonth over month, August (0.3% expected, 0.3% in previous month); CPIon an annual basis, August (8.1% expected, 8.5% in the previous month); CPI excluding food and energyy/y, August (6.1% expected, 5.9% in previous month)

Wednesday: MBA Mortgage Applicationsweek ended September 9 (-0.8% in previous week); PPI end searchmonth over the previous month, August (-0.1% expected, -0.5% in the previous month); PPI excluding food and energymonth over month, August (0.3% expected, 0.1% in previous month); PPI end searchon an annual basis, August (8.8% expected, 9.8% in the previous month); PPI excluding food and energyy/y, August (7.1% expected, 7.6% in previous month)

Thursday: Initial jobless claimsweek ended September 10 (227,000 expected, 222,000 in previous week); Continuing Claimsweek ended September 3 (1.478 million expected, 1.473 in previous week); Empire ManufacturingSeptember (-15.0 expected, -31.3 in the previous month); Retail salesmonth-on-month, August (0.0% expected, 0.0% in previous month); Retail sales without carsmonth over month, August (0.1% expected, 0.4% in previous month); Retail sales excluding cars and gasmonth-on-month, August (0.8% expected, 0.7% in previous month); Philadelphia Fed Business OutlookSeptember (expected 3.0, 6.2 in previous month); Import price indexmonth over the previous month, August (-1.2% expected, -1.4% in the previous month); Export Price Indexmonth over the previous month, August (-1.1% expected, -3.3% in the previous month); Industrial productionmonth over month, August (0.1% expected, 0.6% in previous month); Capacity utilizationAugust (-0.1% expected, 0.7% in the previous month); Manufacturing (SIC).August (-0.1% expected, 0.7% in the previous month); Business inventoryJuly (0.6% expected, 1.4% in previous month)

Friday: University of Michigan Consumer AttitudesSeptember preliminary (59.5 expected, 58.2 in previous month)

Income calendar

monday: Oracle (ORCL)

Tuesday: Basics and Basics (CNM)

Wednesday: BRP (LLC)

Thursday: Adobe (ADBE)

friday: Manchester United (MANU)

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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