Inflation and the Big Week Ahead

Inflation and the Big Week Ahead

There’s a lot going on this week, but the CPI report on Wednesday morning probably has primacy. Until last month, we’ve had a nice and steady pace of slowing inflation. Last month spoiled that trend with a bit of an uptick, but it also wasn’t as bad as feared. Are markets hoping for more of the same?

This month, the basic concern is that inflation is expected to rise at a faster pace. While CPI moved from 3% to 3.2% last month, now the Cleveland Fed expects us to rise to 3.8%. That’s both significantly higher and likely a sign of things to come.  Inflation in the coming month is expected to stick around this level.

Is Cleveland’s expectation again too high? The Wall Street CPI expectation is 3.6%. That still seems high enough to represent a bad print. To be fair, both parties expect Core CPI to slow. The last month had Core CPI at 4.7% Y/Y and the Cleveland Fed expects it to be 4.5% this month, while Wall Street thinks it’ll be 4.3%.

Why is inflation rising? First, some volatile inflation measures, such as energy, are bouncing back. Second, we passed the really big monthly inflation numbers from last year, and comps now are harder to beat. We certainly won’t be beating comps if we hit the 0.8% monthly inflation Cleveland expects. Those comps especially get tougher for the November and December data. Ultimately, if we want to see inflation settle under the 2% level the Fed is looking for, we need to see 0.1% and 0.2% monthly prints. At this rate, that may take a while. Inflation is likely going to start looking more sticky, which is going to hurt some Goldilocks narratives.

As a thought experiment, let’s say inflation does print much higher, making the Fed choose to hike rates as soon as this month, rather than potentially waiting for November. Obviously, that puts more stress on domestic finance systems, but it also hits the world economy, where the euro, yuan, and yen are already showing stress. Already stressed liquidity would get pushed even further and ups the odds of a hard landing across the world.

Otherwise, what’s going on, this week?

On Tuesday, Apple has their big tech event unveiling new products. Though expectations are pretty low, they’re a huge company and this sets expectations. For instance, how will the new iPhone 15 be priced?

In addition to CPI on Wednesday, that’s also when the ARM IPO gets priced, though it won’t trade until Thursday. ARM is a chip designer, and it should be the biggest IPO of the year.

Thursday is when the United Auto Workers say they’re going to go on strike at major automakers. The two sides are still far apart, so this looks likely to move forward. The big questions are how quickly the two sides can reach agreement and what the terms will be. If this drags on, it would actually have an impact on GDP, as this is a significant industry.

Additionally, Retail Sales will get reported in the morning. The expectation is that sales slowed significantly in August, down to 0.1% m/m growth after last month’s 0.7% growth. Would that be good or bad? On the bright side, it represents the cooling of the economy the Fed is looking for but on the other hand may spark worries the consumer is in trouble with student loan payments coming back.

The European Central Bank (ECB) also decides on rates Thursday morning. The general thought is that we’ll see a final rate hike for the cycle. That said, it could be a contentious meeting and they may not be able to confidently say it’s the last hike with inflation still flaring up.

It’s also worth noting that Lennar (LEN) reports after the close on Thursday. They’re a large homebuilder, which is an area that has done quite well amidst rapidly changing interest rates. In turn, that has made the economy and particularly employment look better than it otherwise could have. A beat is generally expected, but it will be interesting to see how their business is doing.

Lastly, we have the large quarterly Options Expiration (OpEx) on Friday. This often marks turning points for the market, which in turn has been starting to look a little wobbly, of late.

In sum, there’s quite a bit going on this week. What happens, and how markets react, should tell us quite a bit about where opportunities may lie for the rest of the year.