All Eyes on the June CPI

Stocks enjoyed a modest uptick this morning, breaking free from last week’s slump as market participants eagerly awaited tomorrow’s inflation data.

The Dow saw a 0.7% increase while the S&P gained by almost 0.5%. The tech-heavy Nasdaq Composite lagged, adding 0.4% through noon.

Despite broader tech underperformance, tech shares Etsy (+9.5%) and Salesforce (+4%) were among the market’s top gainers of the day. Salesforce jumped after the CRM provider announced that it would raise prices next month.

The June Consumer Price Index (CPI), due out tomorrow morning, could dramatically alter sentiment, however. Investors will be looking for further evidence that inflation is slowing, in hopes that it prevents future rate hikes. The CME Group’s FedWatch Tool shows a 92.4% chance of a 25 basis point rate increase at the Fed’s July meeting, which wraps up on the 26th.

But there’s a cloud of uncertainty hovering over the Fed’s action plan for its September meeting, following last week’s hotter-than-expected wage growth, revealed in the June jobs report. This has sparked concerns about policymakers resorting to several more interest rate hikes following a respite in June.

“I think [on Wednesday] you’re going to see further evidence that the CPI-measured inflation is continuing its descent. And a lot of that was because of the impacts of Covid. But that’s not good enough for the Fed. The Fed worries about being [a] wage-price spiral,” said Northwestern Mutual chief investment officer Brent Schutte.

“I think there’s going to be a recession because the Fed [will] keep going until they see the labor market crack and until wage [growth] goes well below 4%.”

June’s year-over-year wage growth was +4.4% or +0.4% month-over-month.

Investors are also processing hawkish comments from two Fed officials. Loretta Mester, President of the Cleveland Fed, and Mary Daly, President of the San Francisco Fed, both said yesterday that an escalation in interest rates might be necessary to push inflation below target.

President Mester believes the rates should ascend “somewhat further,” maintaining this new level. While no firm decision on rate increase has been made for the upcoming meeting, her speech at the UC San Diego Economics Roundtable indicated the potential for a rate rise, holding them at that level to collect more data.

“A slightly higher policy rate would roughly equate the probabilities that the next policy move will be a tightening move versus a loosening move,” Mester said. “This would be a good holding point as we accumulate more information about whether the economy is evolving as expected.”

Likewise, San Francisco Fed President Mary Daly voiced her belief that two more hikes are necessary this year to reduce inflation.

“I was in favor of slowing the pace off tightening, but also realizing that we’re likely to need a couple more rate hikes over the course of this year to bring inflation down,” Daly said during a conversation at the Brookings Institution in Washington. “The risks of doing too little outweigh risk of doing too much, but that gap is getting narrower.”

Both Daly and Mester cautioned about the potential repercussions from the bank failures earlier this year on credit tightening, despite little evidence that banks are becoming stricter about lending due to the Fed’s rate hikes.

“I’m not seeing anything when I talk to banks and see what banks are doing that suggest there’s this extra tightening due to stresses in the banking industry,” said Mester. “But I do think it’s something that we have to keep an eye on because we don’t know necessarily what the magnitude of that could be or the timing of that.”

And so, the market is presented with yet another critical CPI reading tomorrow, which is just as likely to crash stocks as it is to send shares soaring.


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