Investors will turn their focus to inflation next week, after a strong July jobs report indicated that the Federal Reserve may need to take a tougher stance as it raises interest rates. It could also be a week in which investors are watching to see if higher Treasury yields begin to slow the tech sector’s summer rally. The surprise 528,000 increase in July payrolls announced on Friday challenged the market’s view that economic weakness could force the Fed to scale back or even pause its rate increases by the spring of next year. Stocks sold off on Friday after the employment report, and Treasury yields surged higher. Futures markets were immediately priced higher by 0.75 percentage points higher for September, as well as two Fed rate increases of 75 basis points in June and July. The market was expecting a half point rise next month. (1 basis point is 0.01 percentage point). “We’re getting a lot of inflation data next week in terms of inflation expectations, CPI, PPI, unit labor costs. I think that’s going to be the story of the week,” Michael said. Aaron, Chief Investment Strategist at State Street Global Advisors. “As the labor market continues to show strength, it will be important for investors to see if inflation has peaked and is fluctuating. If it doesn’t and continues to accelerate, expect some volatility.” The Consumer Price Index is released on Wednesday, while the Producer Price Index – a measure of wholesale prices – is due out on Thursday. The headline CPI, which includes energy and food, rose at a staggering 9.1% pace in June compared to a year ago. The figure is expected to be lower for July at 8.7%, according to Dow Jones. But core CPI, excluding energy and food, is expected to rise to 6.1% on an annual basis, from a pace of 5.9% in June. Released on Friday, Consumer Sentiment contains consumer inflation expectations, which the Federal Reserve is watching closely. The Evolving Path of Rate Raising The Fed has already raised its target rate range to 2.25% to 2.50%. The latest central bank forecasts show that the Fed expects the interest rate to reach 3.25% to 3.50% by the end of the year. This can change if the data stays hot. The central bank may provide a higher interest rate forecast in September. “What is going to happen is that the Fed’s neutral rate, which is the unconstrained nor the harmonic rate, is still a moving target,” Aron said. “I think what investors are doing with this is they keep trying to figure out what that level is… You’re comparing two GDP numbers that showed technical recessions in terms of Q1 and Q2 being negative, and you’re comparing that in terms of the labor market. It’s a very complex environment to determine what It’s going to be this neutral environment…and it’s constantly changing.” Federal Reserve Chair Jerome Powell said after the latest rate hike that the central bank might be close to neutral. This comment helped some investors believe that the Federal Reserve may cut interest rates next year. “There was some wishful thinking that the Fed was about to finish raising rates and we would be like 2018, growth stocks will be the story again,” said Richard Bernstein, chief investment officer at Richard Bernstein Advisors. “I think the mistake here is to get into long-term growth stocks. I think that’s the mistake.” Bernstein said he likes defensive and league names at the moment. Technology stocks are long-term growth stocks. When interest rates rise, these stocks are at risk. They are highly priced based on the potential for future profits. “If the CPI gets hotter again, I think that will put a thorn in the side of the stock growth story,” Bernstein said. “The growth story of the growth stock is influenced by slow nominal growth, going back to less than the 5% we’ve seen for many years.” Bonds on a roller coaster Last week stocks turned into a mixed performer, with the Nasdaq Composite Index ending the week 2.2% higher. The Nasdaq rose on the back of the technology sector, the best performing sector for the week. The S&P 500 rose 0.3% for the week, while the Dow Jones Industrial Average was marginally lower, down 0.1%. Bond yields were on a wild ride at the same time. The benchmark 10-year yield was up 2.86% on Friday, but reached as low as above 2.51% earlier in the week. At the time, bond analysts said the market was likely to put a near-term bottom for the yield at that level. Strategists are also wondering if a new period of higher yields could threaten the tech rally, especially if the next batch of inflation data is hot. “We’ve suggested that people think of the market as a swing, and the story goes on to define which side of the swing you are,” Bernstein said. “There’s the stock growth aspect, and then there’s everything else in the world.” Earnings season is still underway, but the flow of reports has slowed. Walt Disney reports Wednesday afternoon, and there are a number of travel-related companies, such as Norwegian Cruise Lines, Marriott Vacations, Wynn Resorts, and Hilton Grand Vacations. Next week’s calendar Monday earnings: AIG, Take-Two Interactive, SoftBank, Elanco Animal Health, 3D Systems, Clovis Oncology, Palantir Technologies, Barrick Gold, Viatris, Tegna, BioNTech, Marriott Vacations, ACCO Brands, International Flavors & Fragrances, Cabot, Groupon, Mesa Air, Ambac Financial, Tyson Foods, Party City, ONEOK Tuesday Earnings: Capri Holdings, Aramark, Coinbase, Wynn Resorts, Akamai, Axion, Rackspace, Hyatt Hotels, H&R Block, Trivago, Bausch Health, Aramark, Dine Brands, Ralph Lauren, Norwegian Cruise Line, Sysco, Planet Fitness, Hilton Grand Vacations, Reynolds Consumer Products 6:00 a.m. NFIB Small Business Survey 8:30 a.m. Productivity and Costs Wednesday Earnings: Walt Disney, Fox Corp., Honda Motor, Wendy’s, Bumble , Jack in the Box, Vacasa, Vizio, CyberArk Software 8:30 a.m. CPI 10:00 a.m. Wholesale 11:00 a.m. Chicago Fed President Charles Evans 2:00 p.m. Federal Budget 2:00 p.m. Fed Chairman Minneapolis Yale Kashkari Earnings Thursday: Siemens, Cardinal Health, Hanesbrands, Canada Goose, US Foods, Warby Parker, Brookfield Asset Management, Illumina, Rivian, Poshmark 8:30 a.m. Initial claims 8:30 a.m. PPI Friday 8:30 a.m. Import prices 10: 00 am Consumer confidence
Inflation is the next big focus for markets after the brutal July jobs report