Stocks Down Again As Traders Wonder How High Rates Will Have To Go To Bring Down Inflation  Image: Bigstock Stocks closed lower again yesterday as traders weigh the pace of inflation, interest rates, and the economy. After Fed Chair, Jerome Powell's Jackson Hole speech last week, where he committed to "forcefully" work to combat inflation, and acknowledged that it would likely "bring some pain to households and businesses," the market is wondering how high rates will need to go to get inflation down. The Fed has said they want to see inflation on its way back down to 2%. At the moment, Personal Consumption Expenditures (PCE) (one of the Fed's favorite metrics) is up 6.3% y/y, while Core PCE (ex-food & energy) is up 4.6% y/y. Both of those are down (albeit just slightly) for the last two months in a row. But remain near 40-year highs. The Fed had previously floated that they expect to see the Fed Funds rate between 3-3.5% (the midpoint is at 2.38% currently), by year's end. After September's expected 75 basis points, that would put the Fed Funds at 3.13%. And they would only need another 37 basis points to hit the top end of that range. But nobody believes inflation will be at 2% by year's end. So the question is, what happens after that? Typically, rates need to rise above inflation to tamp it down. If rates start dropping at a faster pace, rates won't need to rise as much. But if inflation proves to be persistent, does that mean a 4% Fed Funds rate, or 5%, or higher? Fortunately, the economy remains resilient. The jobs market is still red hot. And Q3 GDP is expected to come in at 1.6%, which is a big jump from Q1's -1.9% and Q2's -0.6%. But an economy that's too strong will not help break inflation. And the market is trying to determine where the balance is to get it right. In other news, yesterday's Case-Shiller Home Price Index was up an unadjusted 0.4% m/m vs. last month's pace of 1.5%. On a y/y basis it's up 18.6%. That's down from last month's 20.5% pace. But is still a solid gain. The Job Openings and Labor Turnover Survey report (or JOLTS for short) jumped to 11.239 million job openings vs. last month's 11.040M, and views for a dip to 10.4M. And Consumer Confidence jumped as well to 103.2 vs. last month's 95.3, and views for 97.4. Today we'll get MBA Mortgage Applications, the ADP Employment Report, the Chicago PMI, and the State Street Investor Confidence Index. But the report everybody is really waiting for is Friday's Employment Situation report. Last month's report showed a blowout gain of 528,000 new jobs. Well above the consensus for 250,000. The consensus for this report is 293,000 new jobs. This will give investors, and the Fed, another piece of insight on what that could mean for rates, and what that could mean for the economy. In the meantime, the market is looking for direction. It's made a fantastic rebound from its June lows, even with this week's pullback. But the indexes are still down double-digits for the year. And every report will be scrutinized to figure out where the market is headed next. See you tomorrow,  Kevin Matras
Executive Vice President, Zacks Investment Research | 
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