CPI Ahead: Hot Reading Could Lift Rate Hike Odds

Colette Eau Claire (0:05)

Welcome to the Schwab Market Update Podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead.

I'm Colette Eau Claire, and here is Schwab's Early Look at the Markets for Friday, September 11th. Today's eagerly awaited August Consumer Price Index, or CPI, is the last key data before next week's Federal Reserve meeting, and will likely determine action on Wall Street Friday, bearing unexpected developments. Heading into the 8:30 a.m. Eastern Time Report, analysts expect a 0.4% headline monthly reading and 0.2% core, excluding food and energy, according to briefing.com. Those compare with 0.1% and 0.2%, respectively, in July. The wild card may be the core annual CPI reading seen now at 2.4%. That would be the lowest in several years. However, CPI is heavily weighted toward shelter costs, something less weighted in the personal consumption expenditures, or PCE price index, that the Fed tracks closely. A low CPI may be somewhat discounted if shelter costs play a big part. A hot CPI, following Thursday's warm producer price index or PPI report, might well pave the way to a Fed rate hike next week for the first time since 2023 The Fed makes its decision this coming Wednesday. Hot could be in the eye of the beholder. However, the Wall Street Journal pointed out, how the Fed decides to round numbers in the CPI could be a deciding factor. A core reading of 0.26% rounded up to 0.3% versus 0.24% rounded down to 0.2% can make a difference determining if the report sends a hawkish or doveish message. Treasury yields also revisited 2023 this week, climbing above 4.9% for the 10-year yield Thursday for the first time since late that year. Though headline PPI of 0.4% met expectations for monthly wholesale price increases and core PPI excluding food and energy of 0.2% was slightly better than the 0.3% expected, some components that play into the PCE looked hot, something the Fed is likely to take into account. In addition, the government upwardly revised July's PPI readings. A 30-year Treasury auction saw strong demand, however, capping a week of firm buying at several auctions, briefing.com noted. Metrics including airfare, transportation and warehousing were firmer in PPI. After PPI, chances of a rate hike next week climbed to 71% by late Thursday, according to the CME FedWatch tool that compares with 49% a week ago. Overall, PPI of 0.4% was in line with expectations, but still likely too hot for the Fed's liking, said Cooper Howard, director of fixed income research and strategy at the Schwab Center for Financial Research or Skiffer. CPI will be the more important report, but I don't think this squashes the idea of a hike in the near future. Though US crude popped above $100 per barrel Thursday for the first time since May, as the war showed no signs of ending, the market's negative response after PPI appeared mainly due to rate hike worries, not crude. The two-year Treasury note yield that's highly sensitive to near-term Fed policy jumped seven basis points soon after the PPI report, hinting that market participants didn't feel the data offered enough to soothe hawks at the central bank. Three policymakers voted to raise rates in late July, in from the current range from 3.5% to 3.75%.

The European Central Bank raised rates 25 basis points Thursday, responding to energy-driven inflation. Higher rates in Europe and likely Japan next week can push US. Treasury yields up even without a Fed rate hike.

In other data Thursday, the Atlanta Fed's GDP Now metric paid third-quarter gross domestic product growth at 4.4%, down from the previous 4.7% estimate. Weekly initial jobless claims of 206,000 stayed near the low end of the recent range. Oracle and Adobe reported after Thursday's close. Oracle's results easily beat consensus on strong cloud growth, sending shares up more than 7% initially in post-market trading. Guidance appeared to be near the middle of analysts' range. Adobe beat on the bottom line and revenue matched consensus. Guidance also was as expected. Shares initially retreated slightly. The initial strength from Oracle might bode well for tech today, though as of the deadline for this podcast, the company hadn't held its earnings call.

Next week is dominated by the Fed meeting. Earnings are as light as they get, with hardly any S&P 500 firms reporting. Wall Street's suffering continued Thursday, pushing major indexes down for a fourth straight session. The story didn't change much, though the PPI innards didn't help as they pointed toward a firm PCE. So far, September has kept its reputation as a weak month historically. The S&P 500 index is down 1.2% since August 31st. Crude oil is up 17%. However, things would have to get truly ugly to match the March equity selloff.