Fed's preferred inflation gauge and Nike earnings: What to know this week
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A fresh reading of the Fed's preferred inflation measure will put the market rally to the test in the week ahead.
The November release of the Personal Consumption Expenditures (PCE) price index is slated for Friday as economists project inflation will continue to track lower. The economic calendar will also feature updates on housing, consumer confidence, and the final reading of third quarter economic growth.
On the corporate side, Nike (NKE), FedEx (FDX), General Mills (GIS), Micron (MU), and Carnival (CCL) are set to report quarterly results.
The S&P 500 will open Monday having closed seven straight weeks higher, its longest winning stretch since 2017. Stocks surged after the latest Federal Reserve meeting left investors expecting more interest rate cuts next year than previously anticipated.
The past week saw the Nasdaq Composite (^IXIC), the S&P 500 (^GSPC), and the Dow Jones Industrial Average (^DJI) all rise above 2% while the Dow Jones breached 37,000 for the first time.
Inflation in focus
Key to the Fed's call for more rate cuts in 2024 is the central bank's belief that inflation is falling faster to its 2% target than previously hoped. In the Fed's latest Summary of Economic Projections (SEP), the central bank revealed it now sees core PCE, which excludes the volatile food and energy categories, declining to 2.4% next year. It had previously expected inflation to close 2024 at 2.6%.
"Inflation keeps coming down," Fed Chair Jerome Powell said during a press conference on Dec. 13. "The labor market keeps getting back into balance. And it's so far so good, although we kind of assume that it will get harder from here, but so far it hasn't."
Read more: What the Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards
Powell noted that inflation remains above the Fed's 2% goal. Just how far inflation sits above that target will be revealed on Friday with the latest PCE print.
Economists expect annual "core" PCE — which excludes the volatile categories of food and energy — to have clocked in at 3.4% in November. Over the prior month, most economists expect "core" PCE at 0.2%.
"November PCE inflation should show a noticeable step down," Bank of America US economist Michael Gapen wrote in a research note on Friday. "We expect a rise of only 0.1% at the core."
He added: "Altogether, it should put another arrow in the Fed’s quiver that inflation pressures are moderating."
Stocks to shed light on the consumer
In company news, quarterly reports from Nike, FedEx, General Mills, and Carnival will all provide looks at the state of consumer spending, which many see slowing down going into 2024.
Nike and FedEx specifically will also provide investors an early look at holiday shopping demand as their reported quarters ended on Nov. 30 and their guidance for the current quarter will reflect the full holiday season.
"We think the wholesale space in the US remains under pressure," UBS analyst Jay Sole wrote in a research note previewing Nike's earnings. "Inventories are still high and consumers are becoming more price sensitive. The incremental learning vs. 90 days ago is retailers are taking longer than expected to clear inventory."
He continued: "We think tough macro trends will continue as inflation continues to negatively impact consumers, pandemic-era savings are depleted, and higher interest rates weigh on consumer spending."
Indexes and ETFs to watch
Broadly, the stock market rally will also be in focus. The S&P 500 is within striking distance of its all-time high after the Dow recently set its own new record.
The market's shift to price in more interest rate cuts in 2024 sent interest-rate-sensitive sectors soaring over the past week.
The Real Estate sector led market action, rising about 5% across the week. The Russell 2000 (^RUT), which had reversed all of its post-pandemic gains earlier this year over fears of higher rates, also rose roughly 5% while the S&P regional bank index (KRE) popped almost 8%.
To some, this is critical to stocks building a sustainable rally as many Wall Street strategists have called for breadth amid a bull market that had been largely driven by the "Magnificent Seven" stocks: Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA), and Nvidia (NVDA).
Piper Sandler chief investment strategist Michael Kantrowitz noted that the move higher in the Russell 2000 is one sign that the "Fed Pivot relief rally is in full effect," and it might have more room to run.
"A Fed pivot has clear bullish historical precedence," Kantrowitz wrote in a research note on Thursday. "Thus, we believe that breadth in the market will continue to improve."
Kantrowitz sees stocks drifting higher as bond yields fall. A key headwind to this would be if cracks in the labor market materialize. Kantrowitz is watching initial jobless claims, which most recently came in at 202,000. He believes claims will need to stay below about 275,000 to reflect an economy in sound shape.
Weekly calendar
Monday
Economic data: New York Fed Services Business Activity, December (-11.9 previously)
Earnings: No notable earnings.
Tuesday
Economic data: Housing starts, November (1.36 million expected, 1.37 million previously); Building permits, November (1.47 million expected, 1.49 million prior)
Wednesday
Economic data: MBA Mortgage Applications, week ending December 15 (+7.4% prior); Existing home sales, November (3.77 million expected, 3.79 previously); Conference Board Consumer Confidence, December (104 expected, 102 previously);
Thursday
Economic data: Initial jobless claims, week ended Dec. 16 (215,000 expected, 202,000 previously); Continuing jobless claims, week ended Dec. 9 (1.88 million expected, 1.88 million previously); Third quarter GDP, final estimate (+5.2% annualized rate expected, +5.2% previously); Third quarter personal consumption, final estimate (+3.6% annualized expected; +3.6% previously); Philadelphia Fed business outlook, December (-3 expected, -5.9 previously)
Friday
Economic news: Personal income, month-over-month, November (+0.4% expected, +0.2% previously); Personal spending, month-over-month, November (+0.3% expected, +0.2% previously); PCE inflation, month-over-month, November (+0.0% expected,+ 0.0% previously); PCE inflation, year-over-year, November (+2.8% expected, +3% previously); "Core" PCE, month-over-month, November (+0.2% expected, +0.2% previously); "Core" PCE, year-over-year, November (+3.4% expected; +3.5% previously); New home sales, November (687,000 annualized rate expected, 679,000 previously); New home sales, month-over-month, November (+1.1% expected, -5.6% previously); Durable goods orders, November (2.2% expected, -5.4% previously); University of Michigan consumer sentiment, December final (69.4 expected, 69.4 previously)
Earnings: No notable earnings
Josh Schafer is a reporter for Yahoo Finance.
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