Inflation in focus as Fed rate cut debate heats up: What to watch this week

Stocks are back near record highs once more as Apple’s $100 billion US investment lifted the tech trade higher.

For the week, the S&P 500 (^GSPC) rose 2.5% while the Nasdaq Composite (^IXIC) ended with a fresh record close, rising nearly 4% across the five trading days. Meanwhile, the Dow Jones Industrial Average (^DJI) popped about 1.4%.

With markets now pricing in several interest rate cuts from the Federal Reserve this year, Tuesday’s Consumer Price Index (CPI) inflation reading will headline the week of economic news. Investors will also be closely tracking updates on wholesale inflation, retail sales, and consumer sentiment.

On the corporate front, quarterly reports from S&P 500 companies will slow, with just eight expected to report. Quarterly updates from Cava (CAVA), Cisco (CSCO), and Deere & Company (DE) will headline the week of releases.

A new Fed official

A quiet week of economic data did little to change the recent shift in the economic narrative. Fears of a slowing labor market are driving investors to bet the Federal Reserve will cut interest rates by at least a half a percentage point this year.

And the nomination of Stephen Miran, current chair of the president’s Council of Economic Advisers, to replace Federal Reserve governor Adriana Kugler is only fueling predictions that the central bank will be cutting interest rates soon.

Fed officials had already been split on where interest policy should be, with Fed governors Chris Waller and Michelle Bowman dissenting on the central bank’s recent decision to hold interest rates steady.

Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments

JPMorgan chief US economist Michael Feroli wrote in a note to clients that, should Miran be approved as a Federal Reserve Governor by the time of the September meeting, holding interest rates steady again could lead to at least three dissents from officials who believe the Fed should be cutting rates.

“That’s a lot of dissents,” Feroli wrote. “For Powell the risk management considerations at the next meeting may go beyond balancing employment and inflation risks, and we now see the path of least resistance is to pull forward the next 25bp cut to the September meeting.”

Price check

An update on how tariffs are impacting inflation is expected on Tuesday with the release of the July CPI report.

Wall Street economists expect headline inflation rose 2.8% annually in July, an increase from the 2.7% seen in June.

On a “core” basis, which strips out food and energy prices, CPI is expected to have risen 3% over the last year in July, up from the 2.9% increase seen in June. Monthly core price increases are expected to clock in at 0.3%, above the 0.2% seen the month prior.

UBS senior economist Alan Detmeister wrote in a note to clients that tariffs are driving the acceleration in inflation and July’s data will bring the start of a several-month uptrend. Detmeister projects core CPI will move from 2.9% in June up to 3.5% by the end of the year.

Retail reading

On Friday morning, investors will get a fresh update on the state of consumer spending with the release of July retail sales. Economists expect headline retail sales rose 0.5% in July, down slightly from the 0.6% increase seen the month prior.

But RBC senior US economist Michael Reid wrote in a note to clients that much of that increase is expected to come from auto sales. In the retail sales control group, a sub-sector that excludes several volatile categories like autos and feeds into the Gross Domestic Product (GDP) reading for the quarter, Reid projects sales rose just 0.1%.

“We are anticipating an underwhelming print outside of auto sales,” Reid wrote.

Bitcoin or bread?

Signs of a go-go stock market continue to rip higher. Recent research from Apollo chief economist Torsten Sløk points out that Nvidia (NVDA) is trading at the highest multiple for the S&P 500’s biggest stock since Microsoft (MSFT) in 1999. (Disclosure: Yahoo Finance is owned by Apollo Global Management.) IPOs like Firefly Aerospace (FLY) continue to soar during trading debuts, and cryptocurrencies and crypto-linked stocks have caught a fresh bounce.

Richard Bernstein Advisors CEO Richard Bernstein told Yahoo Finance there are usually two things that can bring a speculative surge in markets to an end: One is that the Fed is forced to hike interest rates as inflation pushes higher. This, Bernstein said, makes the cost of leverage both for investors and companies higher, limiting liquidity in markets.

The other scenario is when the Fed cuts interest rates as the economy is slowing rapidly and appears headed toward recession.

“When you get that combination, people stop speculating because they have to buy bread and groceries and things like that,” Bernstein said. “They’re not speculating on bitcoin. They need bread.”

To Bernstein, this puts the Fed’s current quandary at the center of attention for investors wondering how much further the market can balloon higher.

“What the markets have to look at very carefully here is the dilemma that the Fed is faced with,” Bernstein wrote. “Are the employment numbers weak enough so the Fed can cut rates but not weak enough to cause a recession so people start shifting from bitcoin to bread? That’s the dilemma that the Fed is in right now. “

Weekly calendar

Monday

Economic data:

Earnings: BigBear.AI (BBAI), Monday.com (MNDY), Oklo (OKLO), Plug Power (PLUG)

Tuesday

Economic data: NFIB Small Business Optimism, July (98.6 expected, 98.6 previously); Consumer Price Index, month-over-month, July (+0.2% expected, +0.3% previously); Core CPI, month-over-month, July (+0.3% expected, +0.2% previously); CPI, year-over-year, July (+2.8% expected, +2.7% previously); Core CPI, year-over-year, July (+3% expected, +2.9% previously); Real average hourly earnings, year-over-year, July (+1.1% previously)

Earnings: Circle (CRCL), Pony AI (PONY), On Holding (ONON), CoreWeave (CRWV), Rigetti (RGTI), Cava (CAVA)

Wednesday

Economic data: MBA Mortgage Applications, week ending Aug. 8 (+3.1% previously)

Earnings: Brinker International (EAT), Cisco (CSCO), Red Robin (RRGB)

Thursday

Economic data: Initial jobless claims, week ending Aug. 9 (226,000 previously); Retail sales, month-over-month, July (+0.5% expected, +0.6% previously); Producer Price Index, month-over-month, July (+0.2% expected, +0% previously); PPI, year-over-year, July (+2.5% expected, +2.3% previously)

Earnings: JD.com (JD), Deere & Company (DE), Advanced Auto Parts (AAP), Birkenstock (BIRK), Applied Materials (AMAT), Nucor (NUE)

Friday

Economic data: Retail sales ex auto and gas, July (+0.3% expected, +0.6% previously); Import prices, month-over-month, July (0% expected, +0.1% previously); Export prices, month-over-month, July (0% expected, +0.5% previously); Industrial production, month-over-month, July (+0% expected, +0.3% previously); University of Michigan consumer sentiment, August preliminary (62.1 expected, 61.7 previously)

Earnings: No notable earnings.

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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