CPI Will Move the Market, But Economic Growth Is Now the Primary Issue
The inflation report is hitting at the same time as the market is seeing increased technical issues.
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Over the last two years, the Consumer Price Index (CPI) has been the most important economic news impacting the market. The report on Wednesday morning is still of great importance, but economic growth is now the primary focus.
It is anticipated that core CPI will rise by 0.2% in August, which is an annual rate of 3.2%. That is roughly six points lower than where it was two years ago. The Fed and the market now appear confident that inflation is under control, but the issue now is how much economic growth will suffer due to the inflation battle.
The key economic issues now are labor market data and slowing growth. There is still widespread confidence that the Fed has been successful in engineering a soft economic landing, but if inflation drops too quickly, then there will be concern that the Fed is behind the curve and should have already cut rates.
The key issue the market will confront with CPI is whether it pushes the Fed to cut by a quarter point or a half point. If inflation is higher than expected, it will be a significant surprise, but the Fed is already locked into a quarter-point hike, and that is unlikely to change unless CPI is wildly above expectations.
If CPI is lower than expected, that will push the Fed to cut by a half point, but there will be some concern that the economy will be weaker than expected, and there will be increased danger of a recession. Many market players anticipate that the Fed's start of rate cuts will not necessarily be positive in the market because it means that the economy is slowing.
The CPI news is hitting at the same time as the market is seeing increased technical issues. The charts do not look very strong, and the risk is that the bounce over the last two days fails, and the market retests the lows it hit last Friday.
The market has lost the Magnificent Seven names as leaders, and there is also some increased pressure on banks as interest rates continue to move lower. An additional problem is that negative seasonality is still working against the bulls and typically becomes even worse in the second half of September.
We will see a market reaction to CPI, but the bigger issue will be economic slowing, which will remain unclear.
My game plan is to continue to play strong defense with high cash levels. There aren't many good entry points on the charts right now, and it will take time for that to change. The goal is to buy when there is the best chance of a sustained uptrend rather than trying to time a market low.
At the time of publication, Rev Shark had no positions in any securities mentioned.
