Stock market crash fears are swirling ahead of the crucial June consumer price index (CPI) report due this Thursday, July 11. With the chances of a rate cut still up in the air, the long-awaited inflation reading should offer some clarity into the Federal Reserve’s path forward.
Investors and economists have been chomping at the bit for rate cuts this year, so far, to no avail. Stubborn inflation and a relatively tight labor market have pushed the Fed towards holding rates steady until they deem inflation better managed.
“We’ve stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent,” said Fed Chair Jerome Powell at the June Federal Open Market Committee (FOMC) meeting.
As such, this week’s CPI report may prove crucial to the central bank’s monetary objections heading into the next two policy meetings, set for July 31 and Sept. 18.
The CPI is expected to climb 0.07% in June, reflecting an annual inflation rate of 3.12%, per the Cleveland Fed’s Inflation Nowcasting tool. On a monthly basis, this is actually hotter than May’s CPI print, which came out unchanged on the month. Annually, however, this would put inflation below May’s 3.3%, a promising indicator that price growth is easing.
“Core” inflation, which excludes the volatile Food and Energy categories, is expected to rise 0.28% in June, to an annual rate of 3.52%. This is a slightly faster pace of inflation than May’s 0.2% core increase and its corresponding 3.4% annual rate.
What Does the CPI Mean for a Potential Stock Market Crash?
Should the forecasts prove accurate, it would represent mild but meaningful progress toward the Fed’s inflation goal. That said, it’s unclear if it will be enough to merit a rate cut at the July Fed meeting. Per Powell:
“So far this year, the data have not given us that greater confidence. The most recent inflation readings have been more favorable than earlier in the year, however, and there has been modest further progress toward our inflation objective. We will need to see more good data to bolster our confidence that inflation is moving sustainably toward 2 percent.”
While the CME FedWatch Tool estimates a less than 5% chance of a rate cut at the July meeting, it prices in a 73% chance of a rate reduction at the September meeting. Many investors believe the Fed may only opt to cut rates once this year, meaning the September meeting represents the best chance of a cut before year-end.
In that regard, the CPI may hold some weight in the stock market heading into the year’s final leg. Should the CPI come out hotter than expected, it may suggest the Fed will not cut rates come September, or at all, this year. This would, predictably, weigh unfavorably on the stock market, which had priced in rate cuts to come for most of the year.
On the flip side, if the CPI comes out cool, it would strengthen the case for a September cut, affirming Wall Street’s hopes.
With the S&P 500 up over 17% this year, stocks have enjoyed strong, albeit unbalanced, growth. Whether equities continue to thrive heading into the last half of the year may depend on the likes of the CPI and Fed-preferred personal consumption expenditures (PCE) inflation reports.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
