Next week’s inflation data will be the first big test for markets after the Federal Reserve took a dovish stance on interest rates, at a time when bond yields also appeared steady. Stocks recently edged higher after Fed Chairman Jerome Powell said an interest rate hike was unlikely, a sentiment that investors expected to be bullish for stocks. A strong earnings season as well as some cooler labor data also made investors more optimistic about this year’s outlook. The Dow Jones Industrial Average on Friday was heading for an eighth straight day of gains, or its longest winning streak since December. At the same time, the yield on the 10-year Treasury note also fell again from its peak, persisting at around 4.5% after recently peaking at 4.7%. .DJI Dow Jones Industrial Average 1 million mountains But stocks face a key hurdle next week when the April consumer price index is released on Wednesday. Data in line with expectations could signal further upside for stocks, while significantly hotter data could make investors nervous that Fed policymakers will have to watch reconsider their interest rate expectations. “The Fed has made it clear that they think CPI is noisy or just inflation is noisy,” said Mike Dickson, head of quantitative strategy and research at Horizon Investments. will have a pretty big impact on what the Fed will do.” On Friday, all three major indexes were on track for a winning week, with the 30-stock index up more than 2%. The S&P 500 and Nasdaq Composite are both more than 1%. Market reaction This year’s inflation data is extremely important for investors. Not only are investors trying to decipher the Fed’s moves dependent on the data, but recent inflation reports themselves have not been very encouraging. Stocks fell from yearly highs as investors accepted the possibility that the Fed may take longer to return to its 2% inflation target. However, investors are hoping for more upcoming data, with UBS saying this week that it expects “inflation in the US to continue to decline in the coming months”. According to FactSet consensus estimates, the April CPI set for release next week is expected to rise 0.4% and 3.4% monthly and yearly, respectively. That’s an increase of 0.4% and 3.5% respectively from the previous month. Core CPI is expected to rise 0.3% for the month and 3.7% for the year. This will be lower than the corresponding increases of 0.4% and 3.8% in the previous month. However, some investors said they will pay particular attention to how the market reacts to the CPI data rather than the report itself. Notably, Horizon Investments’ Dickson said he will track the ICE BofAML MOVE Index, a gauge that measures volatility in fixed income markets much like the CBOE Volatility Index or VIX, which tracks volatility of stocks. A MOVE index above 100 indicates a more uncertain interest rate outlook and could be a bearish signal for stocks. Recently, the MOVE index fell below 100 after last week’s central bank meeting. But Dickson is expecting the index to remain relatively stable after the CPI release as expected, or even slightly higher, as that suggests the market is expecting the Fed to maintain a moderate stance. “That would be a great result because it shows the market has confidence in what the Fed said last week,” Dickson said. “And so that’s going to be an important statistic to watch.” ‘Fear cuts, not pauses’ Beating the CPI could mean further gains for stocks, especially as more investors believe a Fed pause will bring Good news for stocks. In fact, the S&P 500 has gained an average of 6% during previous pauses over the past 50 years, according to Jeff Buchbinder, chief equity strategist at LPL Financial. But that gain actually increased to an average of 13.1% over the last six pauses since 1989, when gains have accelerated in more modern market history. “Extended pauses are typically good for stocks, and the gains since the Fed’s last rate hike in July 2023 are consistent with recent history,” Buchbinder wrote in a recent note. Elsewhere, Strategas’s Jason De Sena Trennert told investors in a note this week that they should “worry about tapers, not pauses,” as Fed easing “is often associated with to economic and market tensions.” Unless, of course, the central bank achieves a soft landing. For investors hoping the S&P 500 can end the year higher from here, even after an already stellar start, that could mean a buying opportunity. Growth investor Ken Mahoney, CEO at Mahoney Asset Management, predicts investors may now buy back into large-cap tech stocks, excluding Tesla, after their recent decline. “Large-cap tech was tested in April,” Mahoney said. “But after earnings, I think…balance sheet, acquisitions, growth potential, AI potential, etc., all Even those headwinds remain intact.” If anything, investors say the stock’s ability to overcome its recent wall of worries could mean profits from here on out are more sustainable. “I think in April the market was hit three different times and held,” Mahoney said. “So I think that’s another reason why there’s a sense of optimism again.” The consumer earnings report will also be released next week. Home Depot reported Tuesday, as did Charles Schwab. Walmart and Deere reported Thursday. Week Ahead Calendar All Times ET. Monday, May 13 No notable events Tuesday, May 14 8:30 a.m. Producer Price Index (April) Earnings: Home Depot , Charles Schwab Wednesday, May 15 8:30 a.m. Consumer Price Index (April) 8:30 a.m. Hourly Earnings (April) 8:30 a.m. Average Workweek (April) 8:30 a.m. Empire State Index (May) 8:30 a.m. Retail Sales (April) 10 a.m. Business Inventories (March) 10 a.m. NAHB Housing Market Index (May) Earnings: Progress, Cisco Thursday, May 16 8 :30 a.m. Construction Permit Preliminary (April) 8:30 a.m. Continued Unemployment Benefit Claims (May 4) 8:30 a.m. Export Price Index (April) 8:30 a.m. Start home construction (April) 8:30 a.m. Import Price Index (April) ) 8:30 a.m. Initial Inquiries (May 11) 8:30 a.m. Philadelphia Fed Index (May) 9:15 a.m. Capacity Utilization (April) 9:15 a.m. Industrial Production (April) 9:15 a.m. Manufacturing Production (April) Income: Take-Two Interactive Software, Applied Materials, Walmart , Deere Friday May 17 10 a.m. Leading Indexes (April)
