With stocks down today across most major indices, investors are clearly taking a risk-off approach to equities in today’s session. An upcoming Consumer Price Index (CPI) reading tomorrow has investors on the edge of their seats. The report is expected to show an increase in headline inflation from 3.5% to 3.2%, up from 3.2% last month.
If inflation comes in even hotter than expected, all bets are off with respect to how the stock market will react. Rhetoric from certain Federal Reserve officials has come in more hawkish than expected, leading to interest rate cut bets being increasingly taken off the table in the bond market.
If we don’t get the sort of interest rate cuts investors are expecting, it’s entirely possible we could get a steep correction. That’s leading some notable bullish analysts to pull back on their price targets for this year.
Let’s dive into today’s price action and what that might portend for a potential crash.
Stocks Down Today, as Market Awaits Key Inflation Data
The key to a so-called “soft landing,” or the ability of the Federal Reserve to generate a slowdown in the economy without breaking something or effectively doing more harm than good, will require interest rate cuts to guide the economy toward a more stable interest rate range. Federal Reserve Chairman Jerome Powell has spoken at length about the risks of acting too late (in terms of cuts), meaning if interest rates are kept too high for too long, the risk of a credit market or financial market shock increases.
The thing is, the Fed has also indicated they’re going to be data-dependent. So, barring a continuation of the data we’ve seen, which has shown inflation decreasing, rate cuts become less likely. This is the proverbial pickle many economists see the Fed in right now.
It’s my view that we will get rate cuts this year, but it’s increasingly more likely (in my view) that these cuts are needed to respond to something breaking. This economy clearly can’t handle interest rates where they are right now (though some data suggests things are okay). If rates stay higher for longer, risks of a more serious correction increase. That appears to be what’s on the minds of many in the markets today.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
