The US stock market is bracing itself for a critical test in coming days as inflation data is set to reveal its impact on the economy. The upcoming consumer-price index (CPI) report will be scrutinized closely, with investors worried that higher-than-expected inflation could reignite stagflationary fears.
Charles Schwab’s Kevin Gordon warns that hotter-than-expected inflation could “deliver a reality check” to the market, potentially sending stocks into reverse after their recent rebound. The technology-heavy Nasdaq Composite has been on a tear since April, but a hot inflation reading could put the Federal Reserve in a tough spot as it considers rate cuts in September.
Despite concerns over recent labor market deterioration, the unemployment rate remains historically low, and the US economy expanded in the second quarter. Resilient corporate earnings and big investments announced by companies may help shore up confidence in the equity market.
However, investors are still wary of the impact of tariffs on inflation. Some areas like toys, furniture, and sporting goods have already seen price increases, according to George Catrambone at DWS. The Fed is closely monitoring risks to its dual mandate of maximum employment and price stability.
As investors wait for data on wholesale inflation and the producer-price index, Jitania Kandhari at Morgan Stanley Investment Management has been rebalancing out of US stocks into international markets, citing a slowdown in the second half of the year. The yield on 10-year Treasury notes is also under scrutiny, with market participants expecting rate cuts to follow.
Source: https://www.marketwatch.com/story/stock-market-rebound-to-be-tested-by-inflation-reports-as-stagflation-threat-emerges-8309ee55