Inflation and the Fed: What to know this week
Inflation data and the Federal Reserve's latest monetary policy decision will highlight the week ahead for investors celebrating the dawn of a new bull market in stocks.
Tuesday morning will bring investors 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 policy announcement.
Investors currently expect the FOMC will announce a pause in the Fed's rate hiking cycle after having raised interest rates at the conclusion of each of its previous 10 meetings. Tuesday's inflation reading could still shift this outlook.
Other key economic data this week will include retail sales for May and the first reading of consumer sentiment in June from the University of Michigan.
The corporate earnings schedule will be sparsely populated.
The S&P 500 officially entered bull market territory on Thursday after the longest bear run since 1948.
Stocks celebrated with modest gains on Friday as the Nasdaq extended its winning streak to seven weeks.
Research from Bank of America indicates the S&P 500 rises 92% of the time in the 12 months following the start of a bull market, compared to the historical 75% average over any 12 month period dating back to the 1950s.
Wall Street expects headline CPI, which includes the price of food and energy, rose 4.1% over last year in May, a noted decrease from the 4.9% headline number in April.
Prices are set to rise 0.4% on a month-over-month basis. April's data was the slowest year-over-year inflation reading in two years; a 4.1% increase in headline CPI in May would be the slowest since April 2021.
On a "core" basis, which strips out the food and energy prices, inflation is forecast to rise 5.2% over last year in May, a slowdown from the 5.5% increase seen in April. Monthly core price increases are expected to clock in at 0.4%.
The CPI report will be closely watched as the final piece of data for the Fed to digest after the recent jobs report and recent readings on the manufacturing and services sector showed an economy more resilient than many experts expected.
Entering this week's meeting the central bank's benchmark policy rate, the fed funds rate, sits in a range of 5%-5.25%, the highest since September 2007.
"Ultimately, whether the Fed hikes in June and beyond will come down to core CPI inflation," economists at Citi wrote in a note to clients on Friday. Citi sees potential for this report to show prices rising more than expected given used car prices remain stubbornly high.
This week's data on consumer and producer prices comes after the June jobs report shocked economists and showed the largest labor market growth since January.
But the report also revealed slowing wage growth while unemployment ticked higher, leaving some economists to believe the Federal Reserve's tight fiscal policy is already taking hold.
"There is little in the incoming data to suggest the Fed will not follow through on the clear guidance for a pause at next week's Federal Open Market Committee meeting," Michael Pearce, Oxford Economics lead US economist wrote in a note to clients on Friday.
"Even if the core [inflation] number comes in hot, Fed officials are paying more attention to the trend, which is likely to be downward over the second half as base effects work in their favor," Pearce added.
Some pockets of the market have been on a tear since Fed Chair Jay Powell hosted his last press conference on May 3, which followed the Fed raising rates by another 0.25%.
The Nasdaq Composite (^IXIC), driven in part by artificial intelligence hype, has been the clear winner amid expectations the Fed's rate hiking campaign may be winding down, rising 10% since early May.
The S&P 500 (^GSPC) is up 5% over that period while the Dow Jones Industrial Average (^DJI) has seen the smallest gains, adding around 1.4% between Fed meetings.
Between the May and June FOMC meetings, investors have been offered a heavy dose of commentary from Fed officials, which taken together reveal a central bank that appears largely undecided about its next move.
Among voting members of the FOMC, Dallas Fed president Lorie Logan, Minneapolis Fed president Neel Kashkari, and Fed Governor Miki Bowman are among the notable "hawks," or those suggesting more rate hikes are likely required to bring down inflation.
Fed Governor Philip Jefferson and Philly Fed president Patrick Harker are notable "doves," or those in favor of a pause this week, among FOMC voters.
The Fed's interest rate decision on Wednesday will also be accompanied by an updated Summary of Economic Projections, which includes Fed officials' forecasts for inflation, economic growth, and the "dot plot" mapping out expectations for future interest rates.
How the Fed acts on Wednesday, however, doesn't change that recent data has likely shifted the longer outlook for the central bank.
After May's robust jobs report and with expectations for a stubborn inflation print on Tuesday, UBS economist Jonathan Pingle expects an interest rate hike from the Fed in July and rate cuts starting later than initially anticipated.
"We expect the incoming data overall to bolster the case being made by the FOMC participants arguing for further monetary policy tightening," Pingle wrote in a note last week. "Our guess is that the slow progress on core inflation and lack of slowing in the trend gains in employment will erode the arguments against further tightening."
Away from the economic calendar this week, investors will continue to track the market's march higher though the corporate calendar will bring few catalysts.
Earnings from Oracle (ORCL), Adobe (ADBE), Kroger (KR), and Lennar (LEN) will serve as the week's only notable earnings reports.
"We believe we are back in bull territory, which might be part of what it takes to get investors enthusiastic about equities again," Savita Subramanian and the equity strategy team at Bank of America Global Research wrote in a note on Friday.
"Sentiment, positioning, fundamentals and supply/demand support that being underinvested in stocks and cyclicals is still the key risk today — the more likely direction of surprise is still positive."
Weekly calendar
Monday
Economic data: No notable economic news.
Earnings: Oracle (ORCL)
Tuesday
Economic data: NFIB small business optimism, May (88.5 expected, 89 previously); Consumer Price Index, month-over-month, May (+0.2% expected, +0.4% previously); CPI, year-over-year, May (+4.1% expected; +4.9% previously); Core CPI, month-over-month, May (+0.4% expected; +0.4% previously); Core CPI, year-over-year, May (+5.2% expected; +5.5% previously)
Earnings: No notable earnings.
Wednesday
Economic data: MBA weekly mortgage applications (-1.4% previously); PPI, month-over-month, May (-0.1% expected, +0.3% previously); PPI, year-over-year, May (+1.5% expected; +2.3% previously); Core PPI, month-over-month, May (+0.2% expected, +0.2% previously); Core PPI, year-over-year, April (+2.9% expected; +3.2% previously); FOMC interest rate decision (5%-5.25% expected, 5%-5.25% previously)
Earnings: Lennar (LEN)
Thursday
Economic data: Initial jobless claims (250,000 expected, 261,000 previously); Continuing claims (1.76 million previously); Retail sales, month-over-month, May (-0.1% expected, +0.4% previously); Retail sales excluding autos and gas, month-over-month, May (+0.1% expected, +0.4% previously); Import price index, month-over-month, May (-0.6% expected, +0.4% previously); Export price index, month-over-month, May (-0.3% expected, +0.2% previously)
Earnings: Adobe (ADBE), Kroger (KR)
Friday
Economic data: University of Michigan Sentiment, June preliminary (60.5 expected, 59.2 previously)
Earnings: No notable earnings.
Josh is a reporter for Yahoo Finance.
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