The S&P 500 index (NYSEARCA: SPY) is trading down (-25%) for the year, which is technically bear market territory. The major driver for falling stock markets and the rising U.S. dollar index (NYSEARCA: UUP) can be attributed to U.S. Federal Reserve (Fed) interest rate hikes which they are aggressively pursuing to tackle rising inflation. The Fed meets eight times a year to decide on monetary policy. Their rate decisions hinge on certain key economic indicators including inflation, employment, and gross domestic product (GDP). These indicators are reported through economic reports on a monthly basis. The final two Federal Open Market Committee (FOMC) meetings are scheduled for November 2, 2022, and December 2, 2022. These reports often have an immediate reaction in stock markets as they meet, beat or miss expectations and forecasts. Here are the three key economic reports that can influence the Fed’s rate decisions.

Consumer Price Index (CPI) Report

The Consumer Price Index (CPI) is used as the inflation gauge and is reported monthly by the U.S. Bureau of Labor Statistics (BLS). The CPI measures the average rate of change in prices paid by consumers for a basket of products and services compared to the year-ago period. The report includes detailed pricing trends for thousands of items through nearly 23,000 retail and service businesses and 43,000 rental housing units throughout 75 urban areas in the country and eight categories from housing, apparel, transportation, education and communication, recreation, medical care, food and beverages, and goods and services. This rate of change is commonly referred to as the rate of inflation. The report gets very specific with pricing data by industries and locations to derive a general overall CPI figure for the prior calendar month. The CPI hit a 40-year high of 9.1% in June 2022, which has so far been the peak. The following CPI figures show a declining trend of 8.5%, 8.3%, and 8.2% for September 2022. Each report has expectations that have lately been missed (IE: September CPI was expected at $8.1% but came in at 8.2%). The Fed has a target rate of inflation which is currently around 2% compared to the 8.1% rate of inflation in September.

U.S. Employment Report

The U.S. Employment Situation Summary, also referred to as the jobs report is released on the first Friday of every month at 8:30am EST. The report provides information on the unemployment rate, nonfarm payrolls, and wage data like average hourly earnings growth. The labor market is a mandate for the Fed and a slowing economy needs to show rising unemployment and falling payrolls number. Ironically, the bad news is good news for the stock market. If the economy slows down, then inflation can fall, which can then cause the Fed to slow down its aggressive rate hikes, which can allow stock markets to recover as risk-on assets get purchased. Despite the Fed raising rates by 3% in six months, the September unemployment rate actually fell to 3.5% versus the forecast of 3.7%. This means the economy is still hot from a labor standpoint and the Fed will likely continue its aggressive pace of rate hikes. This signals another 75-basis point hike in the November FOMC meeting.

Gross Domestic Product (GDP) report

The U.S. Bureau of Economic Analysis (BEA) releases the gross domestic product (GDP) report at the end of every quarter. The next GDP report is scheduled for November 30, 2022, at 8:30am EST. This report provides the total monetary value of all U.S. goods and services for the quarter and compares it against the prior year ago period to determine if the economy is in an expansion or recession. It illustrates how fast the U.S. economy is growing or slowing with details by state and industry. The BEA estimates GDP three times as well as revises earlier estimates. The advanced estimate comes out a month after the quarter providing an early look. The second and third estimates are provided as more data becomes available throughout the period. The BEA releases both seasonally adjusted and non-adjusted GDP. Recessions are defined as two or more consecutive declining quarters of GDP. Inverted yield curves have proven to precede recessions. The catch-22 with all the government economic reports is they are comprised of historical data which makes them lagging not leading indicators. This also serves the Fed to be reactionary rather than predictive in its moves.