In today's FSI First Word we discuss an important week ahead, most notably August CPI on 9/13 but also an Apple (AAPL) iPhone debut and a potential UAW strike. That said, we still view September as front-loaded on softness and probabilities favor stocks rising after CPI.
Please click here to view today's Macro Minute (Duration: 6:39).
The S&P 500 is about where it was a month ago, 4,450 (plus or minus). In the first three trading days of September, equities fell 2.5% but have tread water in the last two days. In our view, there are a number of important events this week, which we expect to result in stocks managing to move higher from the lows seen on 9/7 (S&P 500 4,430).
* This week has a big slate of data ahead. But of these, the most important is August CPI.
-- 9/11 11:00am ET: NY Fed 1-year inflation August
-- 9/12 1:00pm ET: Apple to debut iPhone 15
-- 9/13 8:30am ET: August CPI
-- 9/14 8:30am ET: August Retail Sales
-- 9/14 8:30am ET: August PPI
-- 9/14 11:59pm ET: UAW expected to go on strike
-- 9/15 10am ET: U Mich Consumer 1-yr inflation Sep. prelim
* The Street is looking for August Core CPI to come in at +0.20% MoM. We estimate that August Core CPI will come in closer to +0.16% to +0.18%, reflecting downside from airfares, softer used car prices and with possible help from softer shelter OER (owners equivalent rent).
* This would be the third consecutive month that core CPI was below +0.20% (+0.16%, +0.16% and +0.20%) and calculates to a 3-month annualized inflation rate of +2.1%. The YoY figure is still elevated at +4.3%, but this is because the year ago (2022) has some huge core prints that will be dropped. September 22 +0.57% is dropped next month. So Core CPI YoY could fall below 4% in September (next month).
* Will a good Core CPI print of below +0.20% matter to markets? In our view, yes. There are a few reasons for this. Foremost, we think this will persuade many Fed FOMC members to now see that inflation is on a glidepath below their tracking estimates. And more importantly, this will likely further reduce the probability of a November rate hike. As of now, the Fed futures markets price in a 41% probability of a November hike.
* A media article posted Sunday (link-> here) by The Wall Street Journal's Nick Timiraos suggests an important change is underway at the Fed regarding future rate hikes. As Timiraos notes "As inflation cools, the burden has shifted toward evidence of an accelerating economy to justify higher rates." To me, this is an important change in the reaction function.
* I know there is pushback to this constructive view. Many cite the fact that oil is up and headline CPI will be +0.6% or higher, the highest readings since mid-2022. Energy does impact goods and some services. But recall, the largest weight in Core CPI is housing at 40%, and unless higher oil prices drives up the price of homes, this surge matters less to the Fed stance.
* There are two other events to be mindful of this week. The expected Apple iPhone 15 debut on Tuesday 9/12 and the likely UAW strike at 11:59pm ET on 9/14. How important these are to markets is not really known but we know both matter.
* Our data science team listed the 20 major strikes since 1919 (there are plenty more). And of these, only 5 (or 20) saw equities fall more than -2% in the following month:
-- Nov. 1919: United Mine Workers -12.5%
-- Sep. 1934: Textile Workers -3.5%
-- Jan. 1946: Steel Strike -2.1%
-- Aug. 1981: PATCO (air traffic controller) -5.4%
-- Aug. 1997: UPS -5.0%
All of these had economic ripples that caused broader risk.
* Economists view the economic risks from the UAW to be less. Thus, while nobody wants to see auto plants shut down, we also think this will prove to be more noise for markets. Will this be enough to offset good CPI news? Perhaps.
BOTTOM LINE: We believe weakness in September was front-loaded. So we see higher probabilities of gains this week.
The market has again become a "game of inches" where investors need to be tactically mindful. August, for instance, was soft in the start and gained later. And September, the first three days were terrible. We think the weakness was front-loaded this month:
* Our constructive stance on markets remains intact. Primarily, we see the glidepath of inflation lower than consensus sees. And if the incoming data continue to be softer (on inflation), the Fed likely shifts away from "data dependency" towards looking at more forward measures. The media article referenced reflects this, with the nuance that accelerating economic growth could pose a risk to this view.
* But we still see equity markets higher by year-end and once we are through this continued chop, we see S&P 500 rising to 4,750 or greater by year-end.
* Moreover, it is encouraging to see leadership coming from Cyclicals like Technology (XLK) 0.21%, FAANG (FNGS) 0.09%, Energy (XLE) 0.97% and Discretionary (XLY) 0.00%. While Industrials (XLI) -0.39% have been soft lately, a strong USD has been a headwind to an extent. The bottoming of PMIs is a positive for Industrials.
Source: JPMorgan Economic Research