Stocks are under pressure following the August Consumer Price Index (CPI) that showed only modest progress on the Fed's inflation fight. Both the headline and core figures for the month inched lower vs. those in July but were a few ticks higher than the respective consensus forecast.
By the numbers, the headline reading for August CPI came in at 8.3% vs. the expected 8.1% and July's 8.5% figure. Food prices rose low-double digits for both at and away from home, while energy higher energy prices relating to electricity and natural gas overshadowed declines in oil and gas prices.
While the Core CPI was expected to tick higher on a sequential basis, the August reading of 6.3% was up vs. July's 5.9% figure amid continued pricing pressure for rent, medical care, new vehicle prices and airline fares, which more than compensated for the month over month drop in used car prices.
Fighting Inflation
As we shared in today's morning note to members, the August CPI is leading to another re-think on not only the pace of interest rate hikes by the Fed but also how long those rates are likely to remain at elevated levels to bring inflation back in line with the Fed's 2% target. Clearly the market was looking for some progress on the inflation fight, but the August CPI report confirmed its going to be a long, drawn-out battle.
With the September Fed meeting now a lock for at 75-basis points, we and the market will now focus on interest rate hikes for the Fed's November and December meetings and the prospects the Fed funds rate could exit this year at or above 4%. We touched on this and other key items for this week in our latest AAP Podcast that we shared yesterday.
Tomorrow brings the August PPI report, and we expect it will receive an extra careful review given that it tends to lead what we see in the CPI report.
In terms of the AAP portfolio, realizing the distance between recent inflation rates and the Fed's 2% target we've been on a cautious path recognizing the risk the Fed would need to go big, longer than the market had been expecting. As we can see by the market's reaction to the August CPI print it is waking up to that reality.
While our cash and inverse ETFs soften today's move in the market, the pullback will give us an opportunity in the coming days to further wade into our defensive, inelastic and US focused positions.
Why US focused?
Last night Oracle (ORCL) was the latest company to sound the alarm on dollar and currency headwinds when it cut its outlook for the current quarter. While it is the latest company, odds are rather high it won't be the last.
Downgrading Morgan Stanley Shares
Following our trimming of Morgan Stanley (MS) shares yesterday, we are downgrading the remaining portion of the position to a Three rating from Two with a targeted exit price of $91. As we've shared previously, (MS) shares face meaningful resistance at that price level and the softness in the IPO market looks to extend further than previously thought.