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All Eyes On CPI Following Hot Employment Report

By Mike Zaccardi, CFA, CMTStock MarketsAug 08, 2022 12:36PM ET
www.investing.com/analysis/all-eyes-on-cpi-following-hot-employment-report-200628218
All Eyes On CPI Following Hot Employment Report
By Mike Zaccardi, CFA, CMT   |  Aug 08, 2022 12:36PM ET
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  • July’s NFP report was more than double market expectations
  • Bonds plunged but equities performed surprisingly well to cap off last week
  • This week’s CPI data will shed more light on the chances of a soft landing

Last week’s stunning jobs report makes Wednesday’s CPI data all the more interesting. Will consumer prices verify a still-hot economy amid the contrasting backdrop of back-to-back quarters of negative GDP growth? The pandemic continues to wreak havoc on what used to be somewhat steady economic gauges. Last Friday’s strong employment data was, of course, met with tremendous bond market selling, as the U.S. 2-year note surged from near 2.8% to above 3.2%. Traders now see the Fed Funds rate climbing toward 3.65% by early next year, according to the CME Group’s FedWatch.

NFP Report Reaction: Short-Term Treasury Note Yields Surge

U.S. 2-Year Bond Chart
U.S. 2-Year Bond Chart

Source: Investing.com

The stock market reacted much more favorably than many investors would have guessed. I’m sure pundits figured equities, particularly high-duration growth shares, would have plunged in response to higher market rates as stocks did so many times during the first half of the year. That did not happen this time.

The S&P 500’s ability to weather higher yields last Friday might actually give Fed Chair Jerome Powell more ammo to hike rates without sending the market and economy into a tailspin. Are stocks finally OK with higher interest rates? Wednesday’s inflation report could be the ultimate tell.

Economists expect just a 0.2% month-on-month rise in headline CPI. Lower gasoline prices and tamer food costs help to drastically cut the advance compared with June’s 1.3% whopper of an advance. Core CPI, which excludes the volatile food and energy segments, is seen as climbing an uncomfortable 0.5%. PPI data will hit Thursday morning.

This Week’s Major Economic Data: CPI Wednesday, PPI Thursday

Economic Indicators Scheduled For This Week
Economic Indicators Scheduled For This Week

Source: Bank of America Global Research

As the average cost of a gallon of gas at the pump crosses back below $4, down each day since the S&P 500’s mid-June low, the stickier shelter and wage components will likely result in elevated CPI prints for the balance of the year. Analysts at Goldman Sachs see rent prices in particular boosting headline and core inflation in 2022.

Official CPI Likely To Remain High Due To Lagging Shelter Component

Rent Inflation Measures
Rent Inflation Measures

Source: Goldman Sachs Investment Research

Looking further out, traders’ expectations of future inflation have steadied. Perhaps that easing of uncertainty helps investors gauge the intrinsic value of securities. The 5-year break-even inflation rate is well off the March high near 3.6% and only modestly above the low a month ago near 2.4%. The 5-year forward break-even is near the middle of its one-year range, making the 10-year break-even rate 2.46% as of last week’s settle. Nevertheless, Treasury rate volatility remains extremely high.

Inflation Expectations: Steadying After Volatile First Half

5-Year Inflation Rate And Expected Rate Chart
5-Year Inflation Rate And Expected Rate Chart

Source: St. Louis Federal Reserve

The Bottom Line

All investors want to know if stocks are in a new bull market; was June 16 a low or the bottom? I assert we will get a better handle on the all-important question based on how stocks react to Wednesday morning’s CPI data. The Fed is in a better position than ever to hike rates as a soft landing might just be possible given a historically tight labor market and a cooling inflation rate.

Disclaimer: Mike Zaccardi does not own any securities mentioned in this article.

All Eyes On CPI Following Hot Employment Report
 

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All Eyes On CPI Following Hot Employment Report

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Comments (3)
Chad Aitken
Chad Aitken Aug 08, 2022 4:07PM ET
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.5 is the over/under from last years Aug report for July. If CPI does come in as expected at .2, then the current 9.1 will drop by .3 or 8.8%. However every month the CPI is postive the Fed is losing the fight. We need to see negative m/m print. The balance sheet is the real rug to pull out from inflaiton, but thats an extra 5t or 50 trillion in the banking system to take away fr the economy. P.S Whole jobs were up 528k, actual number of Americans working went down in the labor force rate.
Robin Hood
RobinHdJr Aug 08, 2022 3:18PM ET
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Gas prices are definitely down from June. However, the rest of the CPI components are probably up. If they don't raise rates again, they can't lower them later after they caused a recession lol
Jeff Gordon
Jeff Gordon Aug 08, 2022 2:43PM ET
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How can CPI not be down from June? I think this number tells us which way the market heads short term. I'm betting we move higher.
Chad Aitken
Chad Aitken Aug 08, 2022 2:43PM ET
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Hey Jeff, see my post above. .5 is the key monthly CPI. If its over that then the 9.1% goes higher.
 
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