Investors await June CPI report for clarity on Fed’s monetary policy stance
A wave of U.S. employment data has left investors scratching their heads about the Federal Reserve’s future monetary policy, but the upcoming June consumer price index (CPI) report may provide more clarity on whether the central bank will need to continue its fight against inflation. The release of the June CPI report on Wednesday is expected to either signal the green light for a continued stock market rally or potentially derail the current momentum.
According to economists surveyed by Dow Jones, the June CPI report is predicted to show a 3.1% rise from the previous year, a slowdown from the 4% increase seen in the previous month. The core price measure, which excludes volatile food and fuel costs, is anticipated to rise 5.0% from a year earlier, down from 5.3% in May.
Tony Roth, Chief Investment Officer at Wilmington Trust, expects to see disinflation continue in June, particularly in the super-core inflation when excluding energy, food, and housing expenses. This trend could contribute to the narrative that the Fed is nearing the end of its tightening cycle. Roth also suggests that if the worst-case scenario of two more interest rate hikes occurs, it would support the belief that the Fed’s objective can be achieved.
On the other hand, Irene Tunkel, Chief Strategist of U.S. equity strategy at BCA Research, believes it will be challenging for the stock market, driven by bullish sentiment and excessive cash balances, to sustain its rally. Tunkel argues that without positive surprises in the CPI data, the market is more likely to decline. She also cautions against premature celebration, citing overly bullish sentiment, extended valuations for technology companies, and the impact of restrictive monetary policy.
The U.S. stock market has experienced a shift from fears of a “hard landing” earlier this year to hopes of a “soft landing” following the Fed’s decision to hold interest rates steady in June. Despite this, Fed Chair Jerome Powell cautioned that more rate increases are expected to combat inflation, with some policymakers forecasting two more quarter-point hikes in the second half of the year.
Investors have been grappling with mixed economic data this week. While U.S. stocks suffered losses after strong private sector job creation in June raised concerns about further rate hikes, a still-strong yet weaker-than-expected nonfarm payrolls report the following day divided opinions on whether policymakers should raise rates beyond expectations.
Fed-funds futures traders currently anticipate a more than 92% probability of a quarter-point interest rate increase later this month. However, expectations for another rate hike have faded somewhat for September and November.
David Lefkowitz, Head of Equities Americas at UBS Global Wealth Management, views the overall tone of the jobs data as a sign that the U.S. economy remains resilient. He emphasizes the importance of considering the interest rate moves in the context of the broader economy, attributing them to a better economic growth outlook rather than inflationary pressures. Lefkowitz also notes the potential for improved corporate profit growth compared to the second half of 2022.
Despite these optimistic perspectives, Irene Tunkel highlights the conundrum between economic growth and inflation, which complicates the current economic landscape. Tunkel explains that a long runway of strong growth may keep inflation from coming down, as the two factors are closely intertwined.
The week ended on a negative note for U.S. stocks, with the Dow Jones Industrial Average experiencing its largest weekly decline since March.