- Dow Jones forecast in focus ahead of August CPI release, with headline seen at 2.9% y/y, core at 3.1% y/y
- Soft labour data and PPI data adds confidence that inflation pressures are moderating
- A much cooler-than-expected CPI could raise bets for a 50bps cut next week
The US dollar has bounced back a tad, while the S&P 500 futures have held near the latest all-time high hit yesterday. The real focus is squarely on US data, and today’s August CPI release is shaping up as the key event before the Fed’s rate decision next week. The Dow Jones forecast could take a fresh boost should inflation data come in softer today.
What are the expectations for CPI
Investors are looking for a headline print of 2.9% y/y and core inflation at 3.1% y/y. on a month-over-month basis, a 0.3% rise in both headline and core CPI is expected – a reading that would signal price pressures are continuing to ease without completely collapsing. If delivered, that would mark modest uptick from last month – not exactly the sign of a clean disinflation trend. Indeed, headline CPI has been stubbornly stuck between 2.3% and 3.0% y/y for over a year now, and core readings have even ticked higher in recent months after touching 2.8% earlier this year. That stickiness makes it tricky for the Fed to justify aggressive easing, even with softer jobs data in hand.
What does the surprise drop in PPI mean for CPI?
Yesterday’s PPI print offered some reassurance. Both headline and core fell 0.1% m/m, and July’s numbers were revised lower as well, hinting at easing pipeline pressures. Together, the weaker labour market and producer price data open the door to speculation that the Fed could consider a 50bps cut next week – provided CPI also comes in tame today. The main drag on the PPI measure of inflation came from a hefty 1.7% fall in “trade services,” effectively a gauge of corporate margins. That suggests firms are absorbing higher input costs rather than passing them on, whether due to cautious demand expectations or a reluctance to risk public and political backlash by hiking prices.
Employment has been even weaker than thought
The other half of the Fed’s dual mandate – maximum employment – isn’t looking particularly good. Last week we saw a weaker-than-expected NFP report which landed just as the Fed entered its pre-meeting media blackout, leaving investors without fresh guidance on how policymakers see the state of the labour market. That was compounded this week by the Bureau of Labor Statistics (BLS) revising its US annual benchmark payrolls by a record -911K for March 2025. This was both more than expected and a record. The news didn’t immediately lead to any fresh dollar selling as it was expected but saw gold hit yet another record high on the back of that and the S&P 500 rose to a fresh record on bets that the Fed may cut rates three times before the year is out.
How might the Fed respond to this week’s inflation data?
The downward revisions to previous jobs data means the employment picture is softer than the Fed had been working with at its last meeting. Together with a potentially weaker CPI report, we may hear a more decisive dovish rate cut next i.e., a 25 bps cut with clear indications in the dot plots of two more cuts before the year finishes. If so, that should be positive news for stocks, all else being equal. Ahead of the FOMC decision next week, we could see more gains in indices on the back of a potentially soft US CPI today. If so, it would add a positive backdrop for the Dow Jones forecast.
Dow Jones forecast: How to trade on the bac of CPI report?
The stock markets would likely welcome a drop in inflation while an in-line reading shouldn’t cause too much concern. A hotter than expected report, however, might lead to some weakness for stocks from these near-record levels.
As far as the Dow Jones chart is concerned, the bullish trend line shown on the daily chart needs to hold to retain the short-term bullish structure. Even if it breaks, this wouldn’t necessarily means we will see a sharp sell-off, but that could nonetheless pave the way for a dip to the next key support area around 45K. Things will get more volatile should we break decisively below 45K support, but we will cross that bridge if and when we get there. On the upside, resistance comes in around 45,750 to 45,800. Above it, it is all clear blue skies again.
In summary
All told, the backdrop of weak jobs report and soft PPI supports the idea that CPI is unlikely to surprise to the upside today, keeping the bullish Dow Jones forecast intact. Even an expected 0.3% m/m print should bolster confidence in the Fed’s path toward three 25bp cuts by year-end. Importantly, it would also keep speculation of a 50bp move next week contained – barring a major undershoot.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
