Stocks End Lower, Poised For A Down Week  Image: Bigstock Stocks closed lower yesterday as the market prepares for next week's Fed meeting in the wake of the latest inflation reports. Tuesday's Consumer Price Index (CPI) report, and Wednesday's Producer Price Index (PPI) report, showed inflation remains below their summer highs, but not by that much. And that has traders wondering how high the Fed will raise rates on Wednesday, 9/21. While it's a near certainty they go at least 75 basis points, there's growing speculation they could raise by 100 bps. But probably more important than how high they raise on Wednesday, is how high they intend to raise for the rest of the year, and next. The Fed had previously said that they expected the target rate to hit 3-3.5% by year's end. And just recently, some Fed members have speculated we could get over 4% early next year. At the moment, the midpoint for the Fed Funds rate is at 2.38%. And another 75 basis points would put the midpoint at 3.13%. So there's still more room to go to hit 3.5% and even 4%. After next Wednesday's meeting, there's two more meetings left before the year's end (November and December), with the first one in 2023 being in February. High inflation is worse for the economy than higher interest rates. And the sooner they can raise rates sufficiently, the sooner inflation will fall. But the question is, how high is that? They are expected to keep rates elevated once they've achieved their target rate. But what that turns out to be, is the real question everyone wants to know. In the meantime, the market is looking for direction. The major indexes continue to trade above their June lows. But recent gains since then (which peaked in August) have been more than cut in half in just a few short weeks. Still, with a far better outlook for the second half of this year vs. the first half (Q3 GDP is expected to come in at 1.3% vs. Q1's -1.6% and Q2's -0.6%), there's plenty of reason to see stocks make their way higher. Especially with valuations below their 5-year average. But fear and uncertainty has gripped the market. In other news, Weekly Jobless Claims came in better than expected with a decline of -5,000 new claims to 213K vs. the consensus for 228K. Retail Sales also beat expectations with a 0.3% m/m gain. On a y/y basis they're up 9.3%. Although, the Philadelphia Fed Manufacturing Index slumped to -9.9 vs. last month's 6.2 and views for 3.1. The Empire State Manufacturing Index was also down at -1.5, but far better than the previous month's -31.3 and the consensus for -12.8. Business Inventories came in as expected with a 0.6% m/m gain. And Industrial Production slipped -0.2%, while Manufacturing Output ticked up 0.1%. The Capacity Utilization Rate came in at a solid 80.0% (although under last month's 80.2% and views for 80.3%). We also heard that the potential rail strike, which had a looming Friday deadline, was averted and a deal was made late Wednesday night. Even though the market didn't show it, many are breathing a sigh of relief as a strike would have snarled already challenged supply chains and exacerbated inflation even more. Today we'll get another look at the economy through the eyes of the consumer with the Consumer Sentiment report. It also happens to be Quadruple Witching, where stock index futures, stock index options, stock options, and single stock futures all expire today, which means we could see even more volatility than normal. So heads up. Best,  Kevin Matras
Executive Vice President, Zacks Investment Research | 
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