Wall Street is on edge heading into the July consumer price report after sharp stock swings this month reignited fears over the fate of the economy.
Economists are predicting that inflation remained broadly unchanged in July — a reading that should allow the Federal Reserve to start easing the brakes on the economy next month by cutting interest rates.
But a sharper-than-expected slowdown in the Consumer Price Index could intensify worries that the economy is moving quickly toward a more pronounced downturn, while a surprise acceleration is likely to rein in rate cut expectations that investors are already counting on to support the market.
That leaves investors in search of an inflation “sweet spot,” Chris Larkin, head of trading and investing at E-Trade, said in a statement: “cool enough that no one will be second-guessing the likelihood of a September rate cut, but warm enough to push aside the recession concerns that have rattled the markets recently.”
The S&P 500 abruptly fell 3 percent on Aug. 5 — its worst day in almost two years. Although it rebounded and recouped its losses, the jolt has left investors braced for further turbulence. Activity in derivatives markets suggests traders are prepared for the S&P 500 to move more than 1 percent in either direction on Wednesday, according to Bank of America analysts.
Some analysts are less concerned, pointing to inflation data on Tuesday that showed producer prices slowing more than expected, helping the S&P 500 to rise 1.7 percent for the day.
“Everyone is so laser-focused on C.P.I., but it is a much bigger picture than that,” said Kristina Hooper, chief global market strategist at the fund manager Invesco. “The mosaic of data is telling a positive story.”
But other factors are intensifying the market’s vulnerability to swings in response to unexpected data points about the economy. They include a slow buildup of risky bets, and concern about whether the rally in shares of big tech companies has gone too far. Both factors have contributed to the choppy movement in recent weeks.
“That backdrop leaves you susceptible to volatility when you have things come out of left field,” said Mike Reynolds, vice president of investment strategy at Glenmede.