Actions rallied during a calm week for economic data on Wall Street.
The Nasdaq Composite (^IXIC) rose just under 1% while the S&P 500 (^GSPC) increased by almost 2%. The S&P 500 ended Friday above 5,200 for the first time since early April. Meanwhile, the Dow Jones Industrial Average (^DJI) rose more than 2% for the week and closed higher for eight consecutive sessions.
In the coming week, a crucial April inflation figure and a retail sales update will highlight the economic calendar. Initial jobless claims will also be in focus after weekly data set hit a surprise nine-month high in the first week of May.
On the business side, Walmart (WMT), Home Depot (HD) and Alibaba (BABA) lead a quieter week in quarterly reporting as earnings season slows.
Price check
Inflation reports stickier than expected ” headlined first-quarter economic data, prompting investors to lower their expectations for a Federal Reserve interest rate cut in 2024.
On Wednesday, investors will get their first glimpse of whether this trend will continue in the second quarter with the release of the April Consumer Price Index (CPI). Wall Street expects an annual gain of 3.4% for the overall CPI, which includes the price of food and energy, down from the 3.5% of the overall figure in March. Prices are expected to rise 0.4% month-over-month, in line with March's increase.
On a “core” basis, which excludes food and energy prices, inflation is expected to have increased by 3.6% year-on-year, a slowdown from the 3.8% rise seen in March. Monthly increases in core prices are expected to be 0.3%, compared to 0.4% the previous month.
Morgan Stanley's economics team, led by Ellen Zentner, wrote in a research note that it believes the descent in inflation “starts” with the April CPI report, led by an easing of pressures on prices for car insurance, rents and health care. According to Zentner's team, this could keep three Fed interest rate cuts on the table this year.
“Weaker monthly numbers ahead and faster disinflation starting in the (second half of 2024) give the Fed the confidence it needs that inflation is on a sustained path toward its goal,” wrote the Morgan Stanley team.
That would likely be a welcome sign for markets, according to Tom Lee, head of research at Fundstrat.
“We believe April CPI could increase the number of (market-built) Fed cuts,” Lee wrote in a note to clients Friday. According to Lee, this would be “positive for stocks”.
As of the start of the week, markets are currently pricing in fewer than two interest rate cuts this year, according to Bloomberg Data.
Retail reading
With the Fed keeping interest rates higher for longer, economists continue to closely watch for any signs that consumer resilience expenses decrease.
A new reading of this trend should greet investors on Wednesday with the April retail sales report. Economists expect retail sales to have increased 0.4% in April from the previous month, down from the 0.7% increase seen in March.
Investors will also be closely watching results from Home Depot (Tuesday) and Walmart (Thursday) for signs of how the U.S. consumer is holding up. So far, business results have provided mixed results on how Americans spend.
“Spending data continued to surprise on the upside, but we sense that households are increasingly prioritizing purchases,” Wells Fargo’s team of economists wrote in a weekly research note . “While volatile and non-discretionary categories have outpaced discretionary over the past year, industry commentary included in the first quarter earnings releases also highlighted a decline in value-seeking consumers.”
Profit Update
With 92% of S&P 500 members reporting first-quarter results, the index expects its strongest year-over-year profit growth since the second quarter of 2022. As of Friday afternoon, the S&P 500 was on track for 5.4% earnings growth. in the first trimester, significantly higher than the 3.2% expected for bank profits at the start of April.
John Butters, FactSet's senior earnings analyst, points out that the index fares even better by removing the huge earnings shortfall from a single company. Bristol-Myers Squibb (BMY) reported a first quarter loss, which weighed on the total performance of the S&P 500 this quarter. Excluding the health care company, the S&P 500 is expected to grow 8.3%, according to Butters.
Stocks don't encourage hot data
Since inflation began to soar in 2021, the stock market has experienced fits and starts in how it reacts to economic data. And this continued into 2024.
In a weekly note to clients, Citi US equity strategist Scott Chronert looked at how stocks are reacting to better-than-expected economic data. Investors began the year looking forward to the data as they anticipated a “soft landing” for the US economy, where inflation would return to the Fed's 2% target without an economic slowdown. At that time, the S&P 500 index rose on Citi's Economic Surprise Index, which gauges whether data is better than consensus expectations.
But after the recent inflation data, markets became more nervous as investors became more nervous. increasingly priced in “no landing”, where inflation does not meet the Fed's target but the economy continues to grow.
This led the market to perceive good economic news as bad news for inflation, and therefore bad news for the market's rate cut hopes. Subsequently, the correlation between the S&P 500 and the economic surprise moved into negative territory.
“This suggests that hot macroeconomic data is increasingly threatening the soft landing scenario that may be necessary to push markets higher from these elevated valuation levels,” Chronert wrote.
If inflation data shows another slowdown again, the question is whether the good news on economic growth will again be welcomed by the market.
Weekly calendar
Monday
Economic data : New York Fed's one-year inflation expectations, April (previously 3%)
Earnings: BuzzFeed (BZFD), Petrobras (PBR), Rock (STNE), Tencent Music Entertainment (TME)
Tuesday
Economic data : NFIB Small Business Optimism, April (88.2 expected, 88.5 previously); Producer price index, month-on-month, April (+0.3% expected, +0.2% previously); PPI, year-on-year, April (+2.2% expected, 2.1% previously)
Earnings: Ali Baba (BABA), Home Depot (HD), Canou (GOEV), Scold (RUM), Sony (SONY),
Wednesday
Economic data : Consumer Price Index, month-on-month, April (+0.4% expected, +0.4% previously); Core CPI, month-on-month, April (+0.3% expected, +0.4% previously); CPI, year-on-year, April (+3.4% expected, +3.5% previously); Core CPI, year-on-year, April (+3.6% expected, +3.8% previously); Real average hourly wage, over one year, April (+0.6% previously); MBA mortgage applications, week ending May 10 (+2.6%); Retail sales, month-on-month, April (+0.4%% expected, +0.7% previously); Retail sales excluding auto and gasoline, April (+0.1% expected, +1% previously); NAHB Housing Market Index, May (51 expected, 51 previously)
Earnings: Cisco (CSCO), Dole (ALMS), Monday.com (MNDY), Super League (LED)
THURSDAY
Economic data : Initial unemployment claims, week ending May 11 (previously 233,000); Month-to-month housing starts, April (8.6% expected, -14.7% previously); Building permits from one month to the next, April (+1.6% expected, -3.7% previously); Philadelphia Business Outlook, May (8.7 expected, 15.5 previously); Import prices, month-on-month, April (+0.2% expected, +0.4% previously); Export prices, month-on-month, April (+0.2% expected, +0.3% previously); Industrial production, month-on-month, April (+0.2% expected, +0.4% previously)
Earnings: Walmart (WMT), Applied materials (AMAT), Baidu (BIDU), JD.com (J.D.), John Deere (OF), Take-Two interactive (TWO), Under protection (SAU)
Friday
Economic data : Leading index, April (-0.2% expected, -0.3% previously)
Earnings: No notable gains.
Josh Schafer is a reporter for Yahoo Finance. Follow him on @_joshschafer.
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