Inflation data and the Federal Reserve’s latest monetary policy decision will highlight the week ahead for investors celebrating the start of a new bull market in equities.
On Tuesday morning, investors will be given the Consumer Price Index (CPI) for May, a release that will come just hours before the start of the Fed’s two-day Federal Open Market Committee (FOMC) meeting, which culminates with Wednesday afternoon’s monetary policy announcement.
Investors are currently expecting the FOMC to announce a pause in the Fed’s rate hike cycle after raising rates at the end of each of its last 10 meetings. Tuesday’s inflation data could change that outlook.
Other notable economic data this week includes retail sales for May and the first reading of June consumer sentiment from the University of Michigan.
The corporate profit plan will be sparsely populated.
The S&P 500 officially entered bull market territory Thursday after the longest bear market since 1948.
Stocks made modest gains on Friday as the Nasdaq extended its winning streak to seven weeks.
Research from Bank of America shows that the S&P 500 rises 92% of the time in the 12 months after the start of a bull market, compared to the historical average of 75% over a 12-month period since the 1950s.
Wall Street expects the Consumer Price Index (CPI), which includes food and energy prices, to have risen 4.1% year over year in May, a sharp decline from April’s total of 4.9%.
Prices are expected to rise 0.4% month-on-month. The April data was the lowest year-on-year inflation reading in two years; A 4.1% rise in CPI in May would be the slowest since April 2021.
On a “core” basis, which excludes food and energy prices, inflation is expected to rise 5.2% yoy in May, slowing from April’s 5.5% rise. Monthly core price increases are expected to come in at 0.4%.
The story goes on
The CPI report will be closely watched as the final piece of data for the Fed to digest after the latest jobs report and the latest manufacturing and services numbers showed the economy is more resilient than many pundits were expecting.
At the start of this week’s meeting, the central bank’s policy rate, the Fed Funds Rate, is in a range of 5% to 5.25%, its highest level since September 2007.
“Ultimately, the question is whether the Fed’s rate hikes in June and beyond are due to core CPI inflation,” Citi economists wrote in a note to clients on Friday. Citi sees the potential in this report to show higher than expected price increases as used car prices remain stubbornly high.
This week’s consumer and producer price data comes after June’s jobs report shocked economists and showed the strongest jobs growth since January.
But the report also showed that wage growth slowed while unemployment rose, leading some economists to believe the Federal Reserve’s tight fiscal policies are already having an effect.
“The incoming data does little to suggest that the Fed will fail to follow its clear guidance to pause next week’s Federal Reserve Open Market Committee meeting,” Michael Pearce, senior US economist at Oxford Economics, wrote in a note to clients on Friday .
“Even if the core [inflation] “When the numbers come out hot, Fed officials pay more attention to the trend, which is likely to be down in the second half of the year as base effects work in their favour,” Pearce added.
Federal Reserve Chairman Jerome Powell attends a news conference in Washington, DC, the United States, on May 3, 2023. (Photo by Liu Jie/Xinhua via Getty Images)
Some parts of the market have been buoyant since Fed Chairman Jay Powell held his last press conference on May 3rd, at which the Fed hiked rates by a further 0.25%.
The Nasdaq Composite (^IXIC), buoyed in part by the artificial intelligence hype, was the clear winner amid expectations that the Fed’s rate-hiking campaign might ease, and is up 10% since early May.
The S&P 500 (^GSPC) is up 5% over the period, while the Dow Jones Industrial Average (^DJI) has seen the smallest gains, gaining around 1.4% between Fed meetings.
Between the May and June FOMC meetings, investors were treated to a slew of comments from Fed officials, which taken together reveal that the central bank appears largely undecided about its next move.
Among the voting members of the FOMC, notable “hawks” include Dallas Fed President Lorie Logan, Minneapolis Fed President Neel Kashkari, and Fed Governor Miki Bowman.
Fed Governor Philip Jefferson and Philly Fed President Patrick Harker are notable “doves” or supporters of a pause among FOMC voters this week.
Wednesday’s Fed rate decision will also be accompanied by an updated economic forecast summary, which includes Fed officials’ forecasts for inflation, economic growth and the “dot plot” depicting expectations for future interest rates.
However, Wednesday’s action by the Fed does not change the fact that recent data has likely shifted the central bank’s longer-term outlook.
Following May’s robust jobs report and expectations of a stubborn inflation number on Tuesday, UBS economist Jonathan Pingle expects the Fed to hike rates in July and cut rates to start later than originally expected.
“Overall, we expect the incoming data to support the arguments made by FOMC participants for further monetary tightening,” Pingle wrote in a note last week. “We expect slow progress in core inflation and a lack of deceleration in trend employment growth will undermine the case against further tightening.”
Economic calendar aside, investors will continue to follow the market’s uptrend this week, although the corporate calendar will provide few catalysts.
Oracle (ORCL), Adobe (ADBE), Kroger (KR) and Lennar (LEN) gains will be the only notable earnings reports of the week.
“We believe we are back in bull territory, which may be part of what it takes to get investors excited about equities again,” Savita Subramanian and Bank of America Global Research’s equity strategy team wrote in a Friday Communication.
“Sentiment, positioning, fundamentals and supply/demand all suggest that underinvestment in equities and cyclicals remains the biggest risk today – the more likely direction of the surprise is still positive.”
weekly calendar
Monday
Economic data: No significant business news.
Merits: Oracle (ORCL)
Tuesday
Economic data: NFIB Small Business Optimism, May (88.5 expected, 89 before); Consumer Price Index, Monthly Comparison, May (+0.2% exp. +0.4% exp); CPI yoy, May (+4.1% exp; +4.9% exp); Core CPI MoM May (+0.4% exp; +0.4% yoy); Core CPI YoY May (+5.2% exp; +5.5% yoy)
Merits: No significant income.
Wednesday
Economic data: Weekly MBA Mortgage Applications (previously -1.4%); PPI, Monthly Comparison, May (-0.1% exp. +0.3% previously); PPI YoY May (+1.5% exp; +2.3% yoy); Core PPI MoM, May (+0.2% exp. +0.2% yoy); Core PPI YoY, April (+2.9% exp. vs. +3.2%); FOMC rate decision (5%-5.25% expected, 5%-5.25% before)
Merits: Lennar (LEN)
Thursday
Economic data: Initial jobless claims (250,000 expected, previously 261,000); Recurring receivables (previously 1.76 million); Retail Sales MoM, May (-0.1% exp. +0.4% yoy); Retail Sales excluding Auto & Gasoline, Monthly Comparison, May (+0.1% exp. +0.4% so far); Import Price Index, Monthly Comparison, May (-0.6% exp. +0.4% previously); Export Price Index, Monthly Comparison, May (-0.3% exp. +0.2% previously)
Merits: Adobe (ADBE), Kroger (KR)
Friday
Economic data: University of Michigan sentiment, June preliminary assessment (60.5 exp., 59.2 so far)
Merits: No significant income.
Josh is a reporter for Yahoo Finance.
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