The primary market catalyst for much of the year has been the belief that the Fed has inflation under control and that additional interest rate hikes will be unnecessary.
Early on Wednesday morning, Fed Fund Futures indicated that the chances of a rate hike on September 20 are just 7%, while the odds of a hike on November 1 are 38%. Current indications are that the Fed may start to cut rates again in June 2024.
The CPI report is due at 8.30 a.m. ET on Wednesday morning and will likely cause some shift in these odds. It is estimated that headline CPI is going to increase to 0.6% due in large part to a jump in energy prices. Core CPI is predicted to stay steady at 0.2%.
Many economists have become more confident that the US economy can avoid a significant slowdown. Hopes of a soft landing or no landing at all have been increasing. For quite a while, there was concern that the lag impact of a dozen interest rate hikes would hit hard, but those concerns have evaporated as the job market has stayed strong and AI has provided hope that technology earnings will continue to jump.
The situation in Europe is quite different. It is now anticipated that the Europe Central Bank will increase interest rates again next week, and there is a clear economic slowdown occurring in Germany. It is a classic stagflation situation, but so far, there is still a strong belief that the US can avoid the same fate.
The CPI report will cause more speculation about whether or not the Fed is done with hiking interest rates, but the debate that is becoming even more important is how much the economy may slow in the next six months or so. There is a very stark debate taking place, with economic bulls feeling quite sanguine about any slowing while the economic bears are becoming increasingly shrill about the danger that lies ahead.
There is no way to know who is right, so we will have to take our cues from the market action. The market has been muddled recently as a bounce after a miserable August has been mixed, and key stocks like Apple (AAPL) and Nvidia (NVDA) have lost momentum.
As I've discussed often, there is very little speculative action in secondary stocks, and many market players seem disinterested and distracted. What the market needs is a kick to stir things up, and maybe CPI will provide that this morning.