Just as last Friday’s U.S. non-farm payroll report mattered for markets, this Wednesday’s inflation report will move stock markets.
The Federal Reserve Bank of Cleveland forecasts the Consumer Price Index to rise by 0.2% or by 2.56% year-on-year. When unemployment falls by 10 bps and inflation is 0.56% above the Federal Reserve’s 2.0% target, expect a small rate interest rate cut later this month.
Stock markets are not content about either data point. Last Friday, the Nasdaq fell by 2.55% while the S&P 500 lost 1.73%. The technology sector is especially vulnerable. Sellers took the Nasdaq down by 4.67% in the last week. They are unwilling to pay a premium in the widely followed mega-cap stocks when interest rates are not falling.
Nvidia (NVDA), Broadcom (AVGO), Alphabet (GOOG), and Apple (AAPL) risks falling by more if the stock market’s fear levels rise further. Their expectations for a 50 bps cut or more are asking for too much. The Fed is already kicking off the start of an interest rate-cutting cycle in two weeks.
The economy needs falling rates to re-ignite economic activity. After the Labor Department revised jobs down by 818,000, the Fed needs to change its monetary policy to achieve maximum employment at stable inflationary rates.
Banks that fell by 3.5% or more last week included JPMorgan (JPM), Wells Fargo (WFC), and Bank of America (BAC). Just like tech stocks, they will not rebound until markets price in prospects of a recovering economy.
