What to expect for September's PPI?

Wall Street extended its losing streak to six straight sessions on Wednesday (October 12) as the US Producer Price Index (PPI) rose more than expected in September. This was just another unfortunate sign to suggest that higher inflation is set to remain elevated.

The PPI, a measure of out-of-factory prices, increased by 0.4% for the month versus an estimated 0.2% gain. On a 12-month basis, the PPI rose 8.5%, slightly lower than the 8.7% in August. The primary source of rising pressure comes from service inflation which is attributed to a 0.4% gain for the month.

What to expect for September's CPI?

The PPI release just comes a day ahead of the closely-watched consumer price index (CPI), a reading that is directly connected to the inflation print.

Economists are expecting the headline annual CPI to decline to 8.1% from 8.3% in August. However, the Core CPI, which excludes seasonal change prices like food and energy, is likely to edge higher to 6.5% from 6.3%.

Investors are demoralized that inflation rates aren't cooling although the Fed has raised rates five times this year to a total of three percentage points. As a result, any upside surprise from the September CPI will see the traders in the market hitting the sell buttom even harder.

For example, when the data for August showed that the Core CPI rose by 0.6% compared to the market expectation of 0.3%, the S&P 500 and tech-heavy Nasdaq tanked 4.3% and 5.2%, respectively.

Technical analysis

The S&P 500 has lost more than 25% in 2022. The price is now hovering around the lowest level in the year with the risk of the 200-week moving average being breached (refer to the weekly chart), an event that only happened twice in the past decade, in December 2018 and March 2020.

A robust September CPI print will lead to such an event, which will likely trigger another round of panic selling to retest a two-year-low.

On the other hand, if the CPI turns softer, chances will rise for the price to move away from the floor level of the year and climb back towards 3675. However, given that the Fed’s meeting is less than two weeks away, it could be too optimistic to expect a sustainable rebound.

S&P 500 daily chart