Finance
What you need to know this week
Stocks rose during a quiet week due to economic data on Wall Street.
The Nasdaq Composite (^IXIC) rose just under 1%, while the S&P 500 (^GSPC) fell almost 2%. The S&P 500 ended above 5,200 on Friday for the first time since early April. Meanwhile, the Dow Jones Industrial Average (^DJI) rose more than 2% this week, closing higher for eight straight sessions.
Over the next week, a crucial April inflation reading and an update on retail sales will highlight the economic calendar. Early unemployment claims will also be in focus after the 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) are having a quieter week in terms of quarterly reporting as earnings season slows down.
Price control
Stronger-than-expected inflation reports led first-quarter economic data, prompting investors to scale back expectations for Federal Reserve rate cuts in 2024.
On Wednesday, investors will get their first look at whether this trend has continued in the second quarter with the publication of the April Consumer Price Index (CPI). Wall Street expects an annual increase of 3.4% for the overall CPI, including the price of food and energy, down from 3.5% in March. Prices are expected to rise 0.4% month-on-month, in line with the increase in March.
On a ‘core’ basis, which excludes food and energy prices, inflation is expected to have risen 3.6% year on year, a slowdown from March’s 3.8% increase. Monthly core price increases are expected to reach 0.3%, up from 0.4% in the previous month.
Morgan Stanley’s economics team led by Ellen Zentner wrote in a research note that it believes the decline in inflation “will start” with the April CPI report, led by easing price pressure on auto insurance, rent and health care. This, Zentner’s team argues, could keep three Fed rate cuts on the table this year.
“Weaker monthly prints ahead, with faster disinflation from here on out [the second half of 2024] gives the Fed the confidence it needs that inflation is on a sustainable path toward its target,” the Morgan Stanley team wrote.
This would likely be a welcome sign for the markets, said Tom Lee, head of research at Fundstrat.
“We think April’s CPI could increase the number of Fed cuts [priced into the market]Lee wrote in a note to customers on Friday. According to Lee, this would be ‘positive for equities’.
Entering the week, markets are currently pricing in fewer than two rate cuts this year, according to Bloomberg Data.
Read retail
With the Fed keeping rates high for longer, economists continue to watch closely for signs that the resilience of consumer spending is waning.
A new reading of this trend will greet investors on Wednesday with the April retail sales report. Economists expect retail sales to rise 0.4% in April from the previous month, compared with a 0.7% increase in March.
Investors will also be closely watching the results of Home Depot (Tuesday) and Walmart (Thursday) to see how the US consumer is holding up. So far, companies’ results have shown mixed results on how Americans spend money.
“Spending data continues to surprise on the upside, but we get the sense that households are increasingly prioritizing purchases,” Wells Fargo’s team of economists wrote in a weekly research note. “Although volatile, non-discretionary categories have outpaced discretionary trends over the past year, industry comments in first quarter earnings also highlighted that consumers are looking for value.”
Earnings update
With 92% of the S&P 500 reporting first-quarter earnings, the index is on track for its highest annualized earnings growth since the second quarter of 2022. As of Friday afternoon, the S&P 500 is on track for 5.4% earnings growth . in the first quarter, notably above the 3.2% expected for bank profits in early April.
FactSet senior earnings analyst John Butters points out that the index does even better if just one company’s massive profit loss is eliminated. Bristol-Meyers Squibb (BMY) reported a loss in the first quarter, dragging down the S&P 500’s overall performance this quarter. Excluding the health care company, the S&P 500 expects growth of 8.3%, Butters said.
Stocks don’t cheer hot numbers
Since inflation began to spike in 2021, the stock market has gone through fits and starts in how it responds to economic data. And that will continue in 2024.
In a weekly note to clients, Citi US equity strategist Scott Chronert examined how stocks are reacting to better-than-expected economic data. Investors started the year with cheering data as they priced in a “soft landing” for the US economy, with inflation returning to the Fed’s 2% target without an economic downturn. At that point, the S&P 500 edged higher thanks to Citi’s Economic Surprise Index, which measures whether the numbers are coming in better than consensus expectations.
But in the wake of recent recent inflation data, markets have become more skittish as investors have increasingly priced in a “no landing,” where inflation falls short of the Fed’s target, but the economy continues to grow.
This had led the market to view good economic news as bad news for inflation, and therefore bad for the market’s interest rate cut hopes. Subsequently, the correlation between the S&P 500 and the economic surprise moved into negative territory.
“This suggests that hot macro data has increasingly threatened the soft landing story that might be needed to push markets higher from these high valuation levels,” Chronert wrote.
If inflation figures show a further decline, the question is whether good economic growth news will be welcome on the market again.
Weekly calendar
Monday
Economic data: New York Fed one-year inflation expectations, April (previously 3%)
Income: BuzzFeed (BZFD), Petrobras (PBR), Stone (STNE), Tencent Music Entertainment (TME)
Tuesday
Economic data: NFIB Small Business Optimism, April (88.2 expected, 88.5 prior); Producer Price Index, month-on-month, April (+0.3% expected, +0.2% prior); PPI, year-on-year, April (+2.2% expected, 2.1% earlier)
Income: Alibaba (BABA), Home Depot (HD), Kanoo (GOEV), Rumble (RUM), Sony (SONY),
Wednesday
Economic data: Consumer Price Index, month-on-month, April (+0.4% expected, +0.4% prior); Core CPI, month-on-month, April (+0.3% expected, +0.4% prior); CPI, year-on-year, April (+3.4% expected, +3.5% prior); Core CPI, year-on-year, April (+3.6% expected, +3.8% prior); Real average hourly wage, year-on-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% prior); Retail sales excluding cars and gasoline, April (+0.1% expected, +1% prior); NAHB housing market index, May (51 expected, 51 earlier)
Income: Cisco (CSCO), Dole (DOLE), Monday.com (MNDY), Super League (SLE)
Thursday
Economic data: Initial unemployment claims, week ending May 11 (previously 233,000); Housing starts month-on-month, April (8.6% expected, -14.7% earlier); Construction permits month-on-month, April (+1.6% expected, -3.7% earlier); Philadelphia Business Outlook, May (8.7 expected, 15.5 earlier); Import prices, month-on-month, April (+0.2% expected, +0.4% earlier); Export prices, month-on-month, April (+0.2% expected, +0.3% earlier); Industrial production, month-on-month, April (+0.2% expected, +0.4% earlier)
Income: Walmart (WMT), Applied Materials (AMAT), Baidu (BIDU), JD.com (JD), John Deere (DE), Take-Two Interactive (TTWO), Under Armor (UAA)
Friday
Economic data: Leading index, April (-0.2% expected, -0.3% earlier)
Income: No significant merits.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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