Nasdaq Dip: CPI Data Review and Other Market Forecasts

Following the early release of the CPI data, another important measure of inflation, on Wednesday, the Nasdaq remained stagnant while some increased. 

The S&P 500 fell 0.1% following the opening bell, while the Dow Jones Industrial Average increased by 0.1%. In morning trading, and according to the tech rally, the Nasdaq composite saw a 0.3% decline.

The Labor Department’s CPI increased by 0.2% in July, in line with expectations. The 2.9% annual increase was marginally less than the 3.0% estimate. 

With food and energy excluded, the core CPI increased by 0.2% in the month and by 3.2% annually. Each fulfilled Econoday’s predictions.

Investors see a higher likelihood of a 25 basis-point federal Reserve’s interest rate cut in September rather than a 50 basis-point cut due to today’s numbers. The implied probability for the smaller cut is currently 64.5%, per the CME FedWatch tool.

As of this writing, the 10-year Treasury yield on U.S. bonds was down, hovering around 3.85%. As of the most recent check, WTI crude prices were trading close to $78.78 per barrel, showing a rising trend.

Tuesday saw a 6.5% increase in Nvidia stock, marking a second consecutive day of strong gains. The shares reclaimed the 21-day EMA. The giant of artificial intelligence experienced its lowest point since mid-May last week before rising.

In other news, Bloomberg revealed that the U.S. Justice Department is considering bringing antitrust acts against Google, which might lead to the search engine behemoth’s dissolution. This caused Alphabet (GOOGL) to sell off more than 2%.

In the meantime, UBS (UBS), which surged 5% in early trading on Wednesday, was a significant earnings mover. At 31.45, UBS stock is getting close to a double-bottom entry.

Individual Stock’s Reaction to CPI 

Mars will acquire Pringles’ parent company in an all-cash deal valued at around $36 billion, including debt. This caused shares of Kellanova to rise 7.8%.  

The bid for Kellanova is $83.50 per share, 12% above the previous closing price. Meanwhile, The Wall Street Journal reported that Elliott Investment Management is gearing up for a proxy war with the carrier.

 As a result, Southwest Airlines (LUV) stock fell 0.2%. Elliott wants to propose ten directors to the Southwest Airlines Company’s fifteen-member board at a special meeting.

CPI Data Review

The consensus forecast for the US CPI data released today is a 0.2% month-over-month rise for July, which is expected to solidify the Federal Reserve’s September interest rate cut.

As April and May inflation numbers approached, market anxiety grew significantly due to the March surge to 3.5%. But the dynamics have changed after a string of weakening US data and positive signals from June’s inflation print, which hit 3%, a one-year low.

As recession n worries surface, market players have begun to actively price in rate cuts from the Feds in response to these softening data.

Positives could be found in the most recent PPI data, which indicated a 2.2% year-over-year increase. This is a significant decrease from the 2.6% increase recorded the previous month. Similarly, the core PPI figure decreased to 2.4% from 3% in the previous month. The month-over-month growth stayed relatively small at 0.1%. 

These numbers give consumers and policymakers yet another reason to be optimistic—they indicate that inflation expectations are starting to ease. 

Possible Occurrences as Disclosed in the CPI Data Report

Market players are eager to comprehend the present state of the economy and potential trends in light of today’s CPI release.

Various factors, including energy prices, supply chain disruptions, labour market concerns, and geopolitical events, still influence global and US inflation trends. There are a few possible outcomes, but the consensus copy of 0.2% month over month and 3% year over year is the most likely.

Let’s take a look at the possible effects on the market depending on various occurrences:

Inflation Above Expectations: The worst-case scenario could occur if the CPI data show higher-than-expected inflation. A downturn in the economy and high inflation may cause investors to shift their portfolios away from risk and toward safer investments. 

Financial markets may become more volatile due to this scenario, and stocks and indexes like the Nasdaq 100 and S&P 500 may decline.

Meets Expectations for Inflation: Should the inflation data match market expectations, this could offer assurance and stability regarding the September rate cuts. 

This implies that the monetary policies in place are managing inflation effectively, which would cause the market to react in a normal to positive way.

Inflation Below Expectations: Less than anticipated inflation rate data may support the Federal Reserve’s shift to a more dovish posture and lead to another decline in the value of the US dollar. Equity markets may rally if investors gain trust and market sentiment keeps improving. 

Democrats are starting to Enjoy Victory With Lower Inflation.

Following over two years of political backlash due to skyrocketing costs, the inflation report released on Wednesday gave many Democrats a sense of victory.

For the first moment since 2021, consumer prices increased by 2.9 per cent in the year ending in July. The Federal Reserve is expected to lower interest rates next month due to the report, which could improve economic sentiment in the US before the November election.

Democrats in Congress also used the report to pressure the Fed to cut rates. Republicans are not going to let Democrats off the hook because they have been criticising them for inflation. 

They continue to point out that since President Biden came into office, prices have increased by almost 20%, and they observe that the labour market is beginning to slow down.

The Democratic presidential candidate, Vice President Kamala Harris, has promised to combat corporate price hikes and is anticipated to present further cost-cutting measures in a speech this week.

Her Republican opponent, ex-president Donald J. Trump, plans to highlight inflation at a rally this weekend in Pennsylvania, according to his campaign. He has asserted that the spending policies of the Biden administration have driven inflation to all-time highs.

Mr Biden approved the inflation figures but cautioned that living expenses were still too high. He claimed that despite having record profits, big businesses needed to do more to assist. 

Conclusion

In summary, the CPI data provides a view of how the inflation trends might influence the central bank’s decisions in the longer and shorter term. The Federal Reserve considers potential rate cuts to manage the borrowing cost and support economic growth. 

Therefore, the impact on large-cap stocks like Nasdaq and sectors like the communication service should be watched. Over the next 12 months, the interaction between inflation rates, unemployment rates, and prices of goods and services will be important to determine the economy. 

The long-term outlook of the CPI data will depend on the ongoing communication between the policymakers and the market participants.