Investors will get another look at the inflation picture next week, but Wall Street is worried the Fed won’t cut interest rates this summer, as some economic indicators have improved. The news comes as stocks are wrapping up a strong month that included record highs. Weak inflation indicators released in early May and a better-than-expected earnings season have reignited investor enthusiasm and stocks are wrapping up a remarkable month of gains. The Dow Jones Industrial Average topped 40,000 for the first time in history this month. But the outlook has been mixed in recent days, as some improving economic indicators and consumer crackdowns have clouded the interest rate outlook. On Friday, the Dow Jones Industrial Average was on the verge of halting a five-week streak of gains, having fallen 2% in the period. Meanwhile, the S&P 500 and Nasdaq Composite Index are on track to post their fifth straight week of gains, up 0.1% and 1.4%, respectively, following Nvidia’s latest earnings report. The April personal consumption expenditure report, due next Friday, could add to the recent optimism but further complicate the Fed’s response. The market expectation for a rate cut is for one in 2024, to occur in November, according to the CME FedWatch tool. .DJI 5D Mountain Dow Jones Industrial Average “It could add fuel to the fire in terms of not cutting this year,” said Mike Dickson, director of research and quantitative strategist at Horizon Investments. But Dickson noted the Fed needs more data before making a decision. “If this month is strong and next month is strong, then the numbers that come out in August are going to be much more important because that could impact whether the Fed cuts.” [interest rate cuts] “It doesn’t matter if it comes before the election or not. Whatever the numbers are this month, we’re not going to reach that conclusion,” Dickson said. Inflation and Consumer Disarray The April personal income and expenditure report, which includes the PCE inflation rate, could confirm the recent trend of cooling inflation. Economists surveyed by FactSet expect the personal consumption index to rise 0.3% last month, down sharply from the previous month’s 0.8% gain. Core PCE is expected to fall to 0.26% and 2.8% on a monthly and annual basis, according to FactSet. That compares with a 0.32% gain in the previous month and a 2.8% gain on an annual basis. “Inflation is likely to improve significantly by September, but it’s far from perfect and still declining year-over-year, so a rate cut is not an obvious decision,” Goldman Sachs economist David Mericle wrote. But some worry that some signs of consumer weakness at a time of high stock valuations could hurt stocks over the summer. A flurry of recent earnings reports have shown conflicting pictures of consumer behavior. Target, for example, said it would lower prices due to less consumer demand. Robinhood Financial investment strategist Steph Guild said he expects an 8-10% correction in the coming months as growing signs of consumer weakness and possible slowing growth. “I think inflation is coming down. It’s coming down slowly, but I think the big reason it’s coming down is slower growth due to the consumer slowdown,” Guild said. Still, he said he’s optimistic that stocks will end the year higher now, and the decline won’t be as big. Similarly, other market observers are concerned that investors are getting too bullish heading into the summer. Goldman Sachs’ Christian Mueller-Grissmann wrote Thursday that the firm’s risk appetite index is nearing its highest level of 2021 and its highest level since 1991, “which could signal a speed limit for risk assets heading into the summer.” “Bullish risk appetite and sentiment is not in itself a bearish signal, especially as long as the macro environment remains favorable,” Christian Müller-Grissmann said. “But it does increase vulnerability to growth and interest rate shocks.” [overweight] “The stock market is doing well and we are looking at selective hedging for the rest of the year to protect our long equity positions,” he said. But Horizon Investments’ Dickson said he expects a favorable stock market outlook regardless of the PCE numbers, and that stronger earnings and a cap on interest rate hikes could continue to boost stocks. Dickson likes large tech stocks but urged caution on smaller stocks that he sees as more likely to rise once investors get a better sense of when the Fed will cut rates. “Given where we are, we’re pretty primed to move higher here,” Dickson said. Next week could see retail earnings results from Costco Wholesale, Ulta Beauty and Dollar General that could continue to provide clarity on consumers. Software companies HP and Salesforce are also due. Calendar of upcoming events All times Eastern. Monday, May 27 No notable eventsTuesday, May 28 9:00 AM FHFA Home Price Index (March) 9:00 AM S&P/Case-Shiller Comparison 20 HPI (March) 10:00 AM Consumer Sentiment Index (May) 10:30 AM Dallas Fed Index (May) Wednesday, May 29 10:00 AM Richmond Fed Index (May) 2:00 PM Fed Beige Book Earnings Releases: HP, Salesforce, Agilent Technologies Thursday, May 30 8:30 AM Continuing Jobless Claims (05/18) 8:30 AM GDP (1st Quarter) 8:30 AM Initial Jobless Claims (05/25) 8:30 AM Wholesale Inventories (April) 10:00 AM Home Sales Outlook (April) Earnings Releases: Costco Wholesale, Ulta Beauty, NetApp, Best Buy, Dollar General, Hormel Foods Friday, May 31 8:30 AM Personal Consumption Expenditures (April) 8:30 AM Personal Income (April) 9:45 AM Chicago PMI (May)
The key for the market next week will be inflation as stocks try to hold on to record highs.
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