Stocks Rally Despite “Hot” August CPI

Stocks opened on a positive note this morning with traders keenly observing the consumer inflation data, a potential determinant for the Federal Reserve’s impending policy decision. The Dow Jones Industrial Average edged up by 0.2%, the S&P 500 ascended by 0.3%, and the Nasdaq Composite, recovering from a 1% dip from the previous session, rose by 0.2%.

The spotlight was on August’s Consumer Price Index (CPI) report, revealing an unexpected surge in inflation. Prices increased by 0.6% month-over-month and 3.7% year-over-year, with the energy sector’s recent rally being a significant contributor. This data is the final inflation metric the Fed will consider before their meeting next week, crucial for determining the trajectory of interest rates.

Both WTI crude and Brent oil prices continued their upward trajectory today, nearing 10-month highs. This surge not only influenced stock movements but also posed challenges for the Fed’s inflation control measures.

The market’s attention remains divided between the much-anticipated Arm IPO, set for pricing today and trading commencement in New York tomorrow, and Apple’s recent iPhone 15 launch. Amidst rumors of “security incidents” with the new iPhone, Chinese officials have refuted claims of curbing iPhone usage within government sectors and state-owned enterprises. These speculations contributed to Apple’s stock decline.

In parallel, the European Union has initiated an investigation into China’s subsidies to its EV manufacturers, aiming to prevent an influx of inexpensive imports. European auto stocks initially benefited from this move but soon faced headwinds due to concerns about potential retaliation from China.

Today’s market dynamics also highlighted the inflationary pressures from rising fuel costs. While earnings have seen a slight increase, the 0.6% surge in consumer prices has led to diminished purchasing power. Michael Farr, a strategist at Hightower Advisors, commented on the inflationary impact, especially on low-wage earners, stating, “Inflation always impacts lower wage earners more even if their wages are increasing: staples take a larger percentage of the paycheck of a low wage earner.”

The recent inflation data, although slightly above expectations, is unlikely to prompt the Federal Reserve to alter its course. Sam Millette, a strategist at Commonwealth Financial Network, remarked, “The higher-than-expected consumer inflation in August is not expected to lead to a rate hike at the Fed’s meeting next week.”

Other analysts agreed, even if the CPI wasn’t what bulls were hoping for.

“This report interrupts the run of good news [and] makes it more difficult to talk a happy game about inflation,” said Dreyfus and Mellon chief economist Vincent Reinhart. “It doesn’t matter for the upcoming FOMC meeting’s results. They’re not going to act. They have not signaled action. Market participants do not expect action. And that’s because they’ve shifted down the pace of tightening.”

“If they act, it will be in November,” Reinhart concluded.

Despite today’s inflation data, the CME Group’s FedWatch Tool showed a slight decrease in rate hike odds for November’s meeting, down to 40% this morning from 41% yesterday. Those odds should change significantly after next week’s Fed meeting.

And so, this morning’s slight uptick aside, bears seem to still be in control in the short term. The S&P may have topped out on Monday after failing to rally yesterday. If those losses hold, the index will have set a lower high relative to its September 1st high, which was also a lower high compared to the S&P’s yearly high from late July.

In other words, technical evidence is building, suggesting that a deeper retracement could soon arrive, and potentially right around the same time that the Fed meets next week.


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