Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.
While the S&P 500 was roughly flat last week, and U.S. 10-year Treasury yields continued to oscillate around the 4.3% level as growth and inflation remain more resilient than expected, WTI closed the week above $90 for the first time in almost a year and has now bounced more than 30% since late-July. The underpinnings remind us of the inventory drawdowns in the back half of 2007 when crude oil surged to $150 despite the unraveling of the 2007–2008 financial crisis.
The WTI price is having an effect as indicators published in the last few days about inflation, and household spending indicate the impact. Headline inflation re-accelerated in August, and while energy only accounts for ~7% of the CPI basket, it contributed ~0.38% of the month-over-month print in August.
Considering the ongoing inflation battle, this might be regarded as bad news for equities, but that hasn’t exactly been the case. The factors that pushed CPI higher in August either do not factor into PCE estimates (airfares and health care services) or receive smaller weights (used autos). The good news is the Fed remains focused on the core CPI. Nonetheless, inflation is trending higher while “core” consumption is softening. Thus, the risk is that energy prices and sticky wages filter through the economy, thus impeding the Fed from reaching its 2% inflation target in 2024 unless it takes additional action.
This week, most of the focus will be on Wednesday’s FOMC meeting press conference, where we expect much of the attention to be centered on the dot plot. The FOMC is expected to hit a pause on rate hikes, and there is little reason for them to lean against consensus expectations. This meeting, however, will be the first dot plot to include 2026 forecasts, and that is where we expect some action. Recent Fed rhetoric suggests officials are encouraged by slowing inflation but would like to maintain optionality for additional tightening this year.
When FOMC members put together their projections, they attempt to estimate how restrictive or accommodative their policy needs to be to achieve maximum employment and price stability. Hence, if inflation is projected to be lower, there should also be a corresponding downward adjustment in policy rate expectations to maintain consistency. Conversely, if the dot plot shifts lower, the market may interpret the dots as a signal of anticipated rate cuts and respond inappropriately. If the dots stay the same and inflation projections are adjusted lower, then we believe the Fed is telling the market that they expect more rate hikes or other restrictive policies that the market is currently not anticipating. That could potentially be messy. We doubt they purposefully choose messy.
Data deck for September 16 - September 22: