US Stocks Slide 0.3% as July CPI Report Looms

The S&P 500 fell 0.3% for a second straight session as investors awaited Wednesday's July CPI report, expected to show prices up 3.4% year over year.

"It's kind of like the 'Enter Sandman' market—sleep with one eye open, hold your pillow tight," Matt Stucky, chief portfolio manager of equities at Northwestern Mutual Wealth Management, said.

The Dow declined 0.3%, or 184 points, while the tech-heavy Nasdaq Composite fell 0.6%. Brent crude futures gained about 1.4% to nearly $89 a barrel, touching $90 early in the day as hopes for a Strait of Hormuz deal faded before U.S. attacks resumed. Yields on 10- and 30-year Treasurys posted their largest single-day declines in nearly a week, closing at 4.683% and 5.235%, respectively.

The CPI print carries outsized weight after July's jobs report showed nonfarm payrolls contracted by 23,000, far below the 80,000 consensus, and wage growth slowed to 3.15% year over year. Bond traders now see roughly an 80% chance the Federal Reserve raises its federal-funds rate target at least once by year-end from the current 3.50%-3.75% range, with the September 16 FOMC meeting the next decision point.

CPI Expectations Point to Third Straight Monthly Cooling

Economists surveyed by FactSet expect July headline CPI to rise 0.1% from June, when prices fell 0.4% in the largest monthly decline in more than six years. Core CPI, which excludes food and energy, is forecast to rise 0.2% for the month and 2.5% from a year earlier, down from 2.6% in June.

Prediction-market traders on Kalshi see less than a 55% probability that the year-over-year CPI rate exceeds 3.3%, and just a 15% chance it tops 3.4% — a more optimistic outlook than the Dow Jones consensus of 3.4%.

Gas prices fell early in July as oil declined on optimism about an end to the Iran conflict, before rising again as fighting resumed. On net, economists expect gas prices to show a 2% to 3% decline in the CPI. "Oil volatility persisted throughout July, with uncertainty over traffic through the Strait of Hormuz," Stephen Juneau, economist at Bank of America, wrote in a note. "However, average prices were still down compared to June."

Outside of energy, "core goods inflation should remain subdued, but core services likely rebounded to more trend-like levels after the June decline," Juneau said. Goldman Sachs economists highlighted mixed autos inflation, benign shelter readings, and mixed travel services as key areas to watch in the report. Deutsche Bank forecast a 0.15% increase in the overall CPI and a 0.26% increase in core inflation, with economists there watching for "payback" from June's outlier price changes.

Fed's Rate Path Hinges on Inflation Trajectory

The inconclusive July jobs report has raised the stakes for the inflation data. Vanguard economist Adam Schickling expects the July report to show "inflation has been stickier and persistent," but "trending in a positive direction, moving gradually closer toward the Fed's 2% target."

LPL Financial chief economist Jefferey Roach said a muddier inflation picture could warrant one rate hike this year, but likely no more. "With the labor market slowing, inflation could become the Fed's key swing factor," he said.

Schickling said the July jobs report, combined with what he expects will be improved inflation news, strengthens the case for the Fed holding rates steady through year-end. "Our conviction in the Fed holding rates constant through year-end has only grown in light of recent data releases," he said.

Newly appointed Fed Chair Kevin Warsh has maintained a hawkish stance, insisting on bringing inflation back to the 2% target. Even if the CPI comes in cooler than expected, markets may only push rate-hike expectations to October rather than pricing them out entirely, analysts said.

Corporate earnings have so far exceeded expectations to record levels, providing some support for equities. "I think we've come off of a pretty violent correction in the AI trade," said Drew Cupps, portfolio manager at Polen Capital. Recent back-and-forth moves among memory and electrical equipment companies are "very healthy market behavior that lays a good foundation for, potentially, a market advance in the quarters ahead."

This article is for informational purposes only and does not constitute investment advice.