Markets Eye August CPI to Gauge What the Fed Will Do on the Rate Hike Front

US futures point to a healthy open here on Tuesday morning, but the real assessment as to how stocks will begin trading today and whether the recent market rally continues will come after 8:30 a.m. ET when the August Consumer Price Index (CPI) report is released. The consensus expectation is for the headline rate to decline marginally month over month and fall on a year-over-year basis to 8.1% from 8.5% in July primarily due to the recent drop in energy and used-car prices. However, the consensus view is also calling for Core CPI to rise 0.3% month over month, reaching 6.1% on a year-over-year basis and up from July's 5.9% figure as goods and services price changes further downstream, ranging from feedstock to transportation costs, are a little stickier.

While a lower-than-expected print for either the headline or core August CPI figures will signal progress on the inflation front, the reality is we would need to see a significant improvement versus the July data to sway the Fed from imposing its expected 75-basis-point rate hike exiting next week's monetary policy meeting. The market may cheer more-than-expected progress with the August CPI data, but as we have shared with members, even a mid-to-upper 7% figure is still light years away from the Fed's stated inflation goal of 2%. That realization is likely to disappoint those who still think the Fed is considering a smaller rate hike next week even though Fed Chairman Jerome Powell and other Fed heads were rather explicit last week in their comments.

We suspect the rate increase expectations to watch will be those for the Fed's November and December meetings following not only today's CPI report but Wednesday's August Producer Price Index report. Current expectations call for a 50-basis-point hike at the November meeting followed by another 25 basis points at the December meeting, leaving the fed funds rate between 375 and 400 basis points.