Wall Street Called the Inflation All-Clear. The Fed's Favorite Number Hasn't.
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The All-Clear
The Inflation All-Clear Came With an Asterisk.
Consumer and producer prices both cooled this week, and stocks closed at record highs. But the one line inside yesterday’s report that feeds the Fed’s favorite gauge went the other way.
It’s Friday. The week’s inflation data is done, and it was good news, mostly. Here’s the footnote the rally skipped, and the date it comes due.
Key Idea
This week buried the September rate hike. CPI and PPI both cooled, and the S&P closed above 7,800 for the first time. But core PCE, the gauge the Fed actually targets, borrows from the exact wholesale prices that ran hot yesterday. That number prints August 26.
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The Week the Scare Ended
The good news first, because there was plenty of it. Consumer prices rose just 0.1% in July. Wholesale prices, what businesses pay before you do, came in flat. Both landed at or below what economists feared.
The market threw a party. The S&P 500 closed above 7,800 for the first time ever, at 7,798.99. The Nasdaq jumped too. And the Russell 2000, the small-company index, hit its own record.
That last one matters. When small caps join the record run, the rally is broadening past a handful of tech giants. Healthier, not narrower.
Oil helped, sliding 2% on the day. And the September rate hike everyone feared last week? Effectively off the table. On the surface, a clean all-clear.
The market threw a party. The S&P 500 closed above 7,800 for the first time ever, at 7,798.99. The Nasdaq jumped too. And the Russell 2000, the small-company index, hit its own record.
That last one matters. When small caps join the record run, the rally is broadening past a handful of tech giants. Healthier, not narrower.
Oil helped, sliding 2% on the day. And the September rate hike everyone feared last week? Effectively off the table. On the surface, a clean all-clear.
The Line the Rally Skipped
Now the footnote. Yesterday’s producer report was cool on top and warm underneath. The headline was flat. But strip it to the parts the Fed cares about, and the picture shifts.
One line jumps out. Prices for portfolio management, what you pay a firm to manage your money, jumped 6.5% in a single month. That’s not a rounding error. And it feeds straight into core PCE.
Core PCE is the Fed’s single favorite inflation gauge. It pulls several inputs directly from this wholesale report, including that one. So the gauge the Fed will actually judge could run hotter than the cool headlines you saw all week.
Read the report the way the Fed does, not the way the ticker did. The cool part was for you. The warm part was for them.
One line jumps out. Prices for portfolio management, what you pay a firm to manage your money, jumped 6.5% in a single month. That’s not a rounding error. And it feeds straight into core PCE.
Core PCE is the Fed’s single favorite inflation gauge. It pulls several inputs directly from this wholesale report, including that one. So the gauge the Fed will actually judge could run hotter than the cool headlines you saw all week.
Read the report the way the Fed does, not the way the ticker did. The cool part was for you. The warm part was for them.
What Comes Due, and When
Here’s the calendar that matters now. Today closes the week with a read on consumer sentiment, a survey of how households feel about spending, plus retail sales. Useful, not decisive.
Then it goes quiet. A near two-week data desert. The Fed’s July meeting minutes drop August 19. And then the reckoning.
August 26 stacks three events on one day. Core PCE, the gauge we just walked through. The second read on second-quarter growth. And Nvidia’s earnings, after the close.
The December hike the market now expects, priced near 73%, rides largely on that PCE number. So does the mood of the whole AI trade, on Nvidia. One Wednesday, less than two weeks out, carries more weight than anything this week did.
Then it goes quiet. A near two-week data desert. The Fed’s July meeting minutes drop August 19. And then the reckoning.
August 26 stacks three events on one day. Core PCE, the gauge we just walked through. The second read on second-quarter growth. And Nvidia’s earnings, after the close.
The December hike the market now expects, priced near 73%, rides largely on that PCE number. So does the mood of the whole AI trade, on Nvidia. One Wednesday, less than two weeks out, carries more weight than anything this week did.
The Number Inside the Number
The market traded the inflation it could see this week. Cool headlines, records, relief. But the Fed trades the inflation it targets, and core PCE pulls from the wholesale service prices that ran hot yesterday. Cool CPI and PPI headlines can sit right on top of a firmer PCE. The crowd cheered the cover. The Fed reads the footnotes. August 26 tells you which one was right.
Three Ways the Next Two Weeks Play
Base
Today’s sentiment and retail sales land near expectations, and the melt-up coasts through the quiet stretch. The S&P holds above 7,800 and small caps keep broadening the rally. Hold quality and the broadening winners: Nvidia (NVDA), the AI chip leader, and the Russell 2000 (IWM), the small-cap index. The real test waits for August 26.
Upside
Consumers hold up and inflation fear keeps fading. The combination every bull wants, cooling prices with steady growth, carries the S&P toward Fundstrat’s 8,000 call. Chips and small caps lead: the semiconductor ETF (SOXX) and the Russell 2000 (IWM). Still, it all has to survive core PCE on the 26th.
Risk
Core PCE comes in hot on August 26, dragged up by the service prices that jumped in yesterday’s report. The December hike, near 73%, hardens toward a lock, and it lands the same day as Nvidia’s earnings. A double catalyst. Expect a 3 to 5% pullback across the back half of August if PCE surprises up. The market priced the cool headlines. It has not priced the hot pieces underneath them. Keep a hedge into the 26th. Trim the richest names, and hide in the energy ETF (XLE) and short-duration bonds.
Our View
We told you yesterday the hike didn’t die, it moved to December. This week’s data confirmed the move and set the day it gets decided.
The relief is real, and the records are earned. But the market is pricing the headlines it can see, not the subcomponents it can’t. Core PCE on the 26th reads from the very wholesale prices that ran hot yesterday. Same day as Nvidia.
So enjoy the melt-up. Just don’t chase it naked into a two-week stretch that ends with a double catalyst. Ride your quality names and the broadening in small caps. Keep a hedge for the 26th. Keep a shopping list for the dip a hot number would hand you.
Wall Street threw the party this week. The bill, if there is one, arrives August 26.
The relief is real, and the records are earned. But the market is pricing the headlines it can see, not the subcomponents it can’t. Core PCE on the 26th reads from the very wholesale prices that ran hot yesterday. Same day as Nvidia.
So enjoy the melt-up. Just don’t chase it naked into a two-week stretch that ends with a double catalyst. Ride your quality names and the broadening in small caps. Keep a hedge for the 26th. Keep a shopping list for the dip a hot number would hand you.
Wall Street threw the party this week. The bill, if there is one, arrives August 26.