A flurry of U.S. employment data this week left investors puzzled about the future stance of the Federal Reserve’s monetary policy, but next week’s June CPI report may give the stock market more clarity on whether the Fed will still have to ratchet up its fight against inflation after pausing its aggressive series of interest-rate hikes last month.
The June CPI reading from the Bureau of Labor Statistics, which tracks changes in the prices paid by consumers for goods and services, is expected to show a 3.1% rise from a year earlier, slowing from a 4% year-over-year advance seen in the previous month, according to a survey of economists by Dow Jones. The core price measure that strips out volatile food and fuel costs, is expected to rise 5.0% from a year earlier, down from 5.3% in May.
However, it is hard for the stock market which is currently driven by “bullish sentiment” and “excessive cash balances” to continue the rally because “how can you get surprised on the upside when you’ve already priced in lots of good news,” said Irene Tunkel, chief strategist of U.S. equity strategy at BCA Research.
See: Here’s what stock-market investors — and probably the Fed — don’t like about the June jobs report However, one day later, a still-strong but weaker-than-expected June nonfarm payrolls report has taken some steam out of what had been a stunningly resilient labor market, leaving investors divided over whether the results are strong enough to force policymakers to raise rates further than expected and risk driving the economy into recession.
However, Roth of Wilmington Trust thinks Friday’s report shows a “major inflection in the labor market” that there is no reason to think that the Fed still needs to keep rates at higher levels for so long, but it is “very orthogonal” to the Fed’s tightening path in the second half, which is more interest-rate hikes.