A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can register here. New York CNN Business —
Is inflation really peaking? Are consumers becoming more confident? We’ll get those answers this week when all the latest consumer and producer price indices and retail sales data for August come out.
The numbers could change the calculus for the Federal Reserve, which is guaranteed to raise rates again at its next policy meeting on September 21. The question is, by how much?
Traders still expect another rise of three-quarters of a percentage point, or 75 basis points, the third straight move of that size. And Fed Chairman Jerome Powell said last week that “the Fed has and accepts responsibility for price stability. We must act immediately.”
But could the chances of another huge rate hike diminish if inflation data continues to suggest that “price stability” could finally be closer to reality? The consumer price index (CPI) numbers are released on Tuesday morning, while the producer price index (CPI) data will be released on Wednesday.
Keep in mind that at the end of July, the market was pricing in just a 28% chance of a 75 basis point increase in September. Investors now believe there is an 88% chance of another big hike, according to Fed Funds futures trading on the CME.
Economists currently forecast that consumer prices for August will fall slightly from July and that prices have risen 8.1% over the past 12 months. Of course, 8.1% is still incredibly high by historical standards, but it would be a marked slowdown from June’s 9.1% year-over-year rise in prices.
“We have probably seen the peak of inflation. Food and energy prices are falling. There is more room for downside,” said Joe Kalish, chief global macro strategist at Ned Davis Research.
Investors appear to be grudgingly accepting the possibility that the Fed will raise interest rates again by 75 basis points in a few weeks…regardless of what August’s inflation data shows.
But traders hope September’s rate hike is the last of its kind. Assuming the Fed raises rates by three-quarters of a point on September 21, that would bring rates into a target range of 3% to 3.25%.
See CME Fed Funds futures for November. As of midday Friday, investors were pricing in a 70% chance of a half-point hike at the Fed’s Nov. 2 meeting … to a range of 3.5% to 3.75%.
There was only a 10% chance of a fourth consecutive 75 basis point increase, however, which could be one reason why stocks have rallied so far in September after falling in August.
Wall Street is clearly betting that inflation trends will continue to move in the right direction. Economists also expect producer prices, the cost of goods at the wholesale level, to fall slightly in August. Forecasts are for a 0.1% decline from July to August, after a 0.5% decline from June to July.
Producer prices rose 9.8% year-on-year in July, but that’s down from June’s high of 11.3%. Any further slowdown would likely be welcomed by the market, the Fed and consumers.
This brings us to retail sales. Consumer spending data for August is released on Thursday morning. The government reported last month that retail sales rose 10.3 percent year-on-year in July. It will be interesting to see if that sales pace picked up in August or slowed down.
The Fed is in a difficult position. It wants to ease inflationary pressures, and the way to do that is with big interest rate hikes. But the Fed would also like to avoid a recession if it can, which is why some are still hoping for a soft or “soft” landing for the economy, as Powell said in May.
Powell also talked about interest rate hikes and inflation causing “some pain” in the economy in his speech in Jackson Hole last month. This could be an argument for the Fed to make smaller rate hikes…as long as inflation continues to decline.
And that’s the key point. Investors should pay more attention to inflation data than Powell or other Fed members say. The Fed remains data-driven, so the odds of a rate hike are constantly in flux.
“There has to be a convincing downward trend in inflation. We’re not there yet,” David Donabedian, chief investment officer at CIBC Private Wealth US, said in a report on Friday.
The economy isn’t the only thing in focus next week. Two software giants, Oracle ( ORCL ) and Adobe ( ADBE ), will report their latest earnings. Investors will be watching for clues about the state of technology spending among large businesses.
Shares of both companies have fallen this year, along with the rest of the tech sector and the broader market. Oracle is down nearly 15%, while Adobe is down more than 30%.
However, analysts expect solid sales growth from both companies… nearly 15% for Adobe from a year ago and nearly 20% growth from Oracle.
One investment strategist said big tech companies like Oracle and Adobe make sense for investors.
“We have big technologies that are much more mature and established,” said Suzanne Hutchins, head of real returns strategy and senior portfolio manager at Newton Investment Management.
Results from Oracle and Adobe will also serve as a preview for the deluge of third-quarter tech earnings to come later in October. Solid results from these two could be a good sign for Microsoft ( MSFT ), SAP ( SAP ), IBM ( IBM ) and other cloud software companies.
But recent gains from Salesforce ( CRM ), which has been cautious about its guidance, could be a warning sign for both companies, according to Daniel Morgan, senior portfolio manager at Synovus Trust Company. Oracle and Adobe could also be hurt by the rising dollar, as it will drive profits from their international operations.
“Both companies generate more than 40% of sales outside the US,” Morgan noted in a report.
Monday: China’s markets are closed. earnings from Oracle
Tuesday: US CPI? Starbucks (SBUX) Investor Day. Meeting of shareholders of Twitter (TWTR) to vote on the acquisition of Elon Musk
Wednesday: US PPI
Thursday: US retail sales. Weekly US jobless claims. meeting between Russia’s Vladimir Putin and China’s Xi Jinping; Adobe earnings;
Friday: US U. of Michigan consumer sentiment. China retail sales, unemployment and other economic data
