Investors are focused on inflation over the coming week, after July’s strong jobs report signaled that the Federal Reserve may need to take an even tougher stance with interest rate hikes. This could also be a week in which investors watch whether rising Treasury yields begin to slow the tech sector’s summer rally. July’s surprise payroll increase of 528,000 announced on Friday challenged the market’s view that economic weakness could force the Fed to scale back rate hikes or even pause by spring. next year. Stocks sold off on Friday after the jobs report and Treasury yields soared. Futures markets immediately priced in a 0.75 percentage point hike for September, on top of the Fed’s two 75 basis point interest rate hikes in June and July. The market was expecting a half-point rise next month. (One basis point equals 0.01 percentage point). Arone, chief investment strategist at State Street Global Advisors. “As the labor market continues to show strength, it will be important for investors to see whether inflation has peaked and is continuing. If it hasn’t and continues to accelerate, hold on. you to some volatility.” The consumer price index is released on Wednesday, while the producer price index – a measure of wholesale prices – is due on Thursday. The headline CPI, which includes energy and food, rose at a blistering pace of 9.1% in June, compared to a year ago. That 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% year-on-year, from a pace of 5.9% in June. Consumer Sentiment is released on Friday and contains consumer inflation expectations, which are closely watched by the Fed. The Changing Path of Rate Hikes The Fed has already raised its target rate range from 2.25% to 2.50%. The latest forecast from the central bank shows that the Fed expects the rate to be 3.25% to 3.50% by the end of the year. This could change if the data stays hot. The central bank may introduce a forecast of higher interest rates in September. “What’s going to happen is that the Fed’s neutral rate, the one that’s neither restrictive nor accommodative, continues to be a moving target,” Arone said. “I think what investors are doing with this is they keep trying to figure out what that level is…You’re contrasting two GDP numbers that showed a technical recession in terms of the first and second quarters negatives, and you contrast that in terms of It’s a very complex environment to determine what that neutral environment will be…and it’s constantly changing Fed Chairman Jerome Powell said after the last rate hike that the bank was likely close to neutral. That comment helped spur some investors to believe that the Fed might even cut rates next year. “There was a bit of wishful thinking that the Fed was about to end rising rates and we’re going to be like 2018, and growth stocks would be history again,” said Richard Bernstein, chief investment officer of Richard Bernstein Advisors. “I think the mistake here is to go in long-term growth stocks. I think that’s the mistake.” Bernstein said he likes defensive and cyclical names at the moment. Tech stocks are considered long-lived growth stocks. When interest rates rise, these stocks are vulnerable. They are expensive relative to their future earnings potential. “If the CPI is hotter again, I think that will really put a thorn in the side of the growth stock’s story,” he said. Bernstein: “The growth stock story is rushed into slow nominal growth, back to the sub-5% we’ve seen for so many years.” Bonds on a roller coaster Stocks last week saw performance mixed, with the Nasdaq Composite ending the week up 2.2% The Nasdaq gained on technology, the best performing sector of the week. that the Dow Jones Industrial Average was slightly down, down 0.1%. Bond yields soared at the same time. The benchmark 10-year yield was as high as 2.86% on Friday, but bottomed out just above 2.51% earlier in the week. At the time, bond strategists said the market is likely to hit a near-term bottom for yield at this level. Strategists are also wondering if another round of rising 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 seesaw, and the story continues to be which side of the seesaw you’re on,” Bernstein said. “There’s the growth equity side, 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, like Norwegian Cruise Lines, Marriott Vacations, Wynn Resorts and Hilton Grand Vacations. Schedule for the Week Ahead Monday Gains: 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 and 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 Marques, 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 Gains: Walt Disney, Fox Corp, Honda Motor, Wendy’s, Bumble , Jack in the Box, Vacasa, Vizio, CyberArk Software 8:30 a.m. IPC 10:00 a.m. Wholesale Trade 11:00 a.m. Chicago Fed Chairman Charles Evans 2:00 p.m. Federal Budget 2:00 p.m. Minneapolis Fed Chairman Neel Kashkari Thursday Results: Siemen s, Cardinal Santé, 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 a.m. Consumer sentiment
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