All Depends On The CPI

The stock market's path this week may depend on the August CPI Report, due September 13.  A high CPI, particularly Core, would depress the market, as it would exacerbate concern the Fed will continue to tighten to restrain the economy.  Even if the Fed pauses at the September 19-20 FOMC Meeting, Powell's rhetoric would presumably be hawkish -- raising the possibility of a resumption in rate hikes at subsequent FOMC meetings.  In contrast, a benign print for the Core CPI, which is the consensus estimate, could trigger a relief rally in stocks and Treasuries, as it would add to the evidence in the August Employment Report that suggests a longer pause in Fed tightening can be justified.

Consensus looks for a benign print for Core -- +0.5% m/m August Total and +0.2% Core.  The consensus estimates can't be ruled out, but there is upside risk for both Total and Core.  A jump in gasoline prices is primarily responsible for a high Total, and it may push up Total by more than consensus expects.  It can't be dismissed as temporary, since the continued run-up in crude oil prices points to a further increase in gasoline prices in September as well as the potential for higher fuel costs to be passed through to Core components.

There is mixed evidence regarding the Core CPI.   Higher fuel prices and a boost from seasonal factors raise the risk of a jump in Airfares in August.  This could lift the Core CPI to 0.3%.   However, a slowdown in Owners' Equivalent Rent (OER) to 0.4% from 0.5% could prevent a 0.3% print.  This is conceivable, since this deceleration was already seen in Primary Rent in July.  But, there is no guarantee it will happen for OER in August.

There are other favorable developments in the background.  The stronger dollar holds down import prices.  Indeed, Import Prices for Non-Auto Consumer Goods fell in June and July. while prices of imports from China have been in a downtrend.  Also, some large companies are reported to be cutting wage rates, eliminating the premium paid post-pandemic amidst labor shortages.   

Aside from inflation, the latest Unemployment Claims data argue against a slowdown in economic growth in early September.  Initial Claims show that layoffs are down to their lowest level since February.  And, Continuing Claims suggest re-hiring has resumed, as they are down to their mid-July level.  Near-consensus prints for August Retail Sales (+0.2% m/m Total and +0.4% Ex Auto) would add to this bullish-growth evidence.  Even taking out higher-priced gasoline sales would likely show little, if any, payback for the sales jump in July -- if the consensus estimate is right.  The Atlanta Fed model's latest estimate of Q323 Real GDP Growth is 5.6% (q/q, saar).

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