What you need to know this week

Stocks ended last week on a hot streak as weaker-than-expected inflation data fueled investor optimism about interest rate cuts.

The Nasdaq Composite (^IXIC) rose more than 3% while the S&P 500 (^GSPC) jumped almost 1.5%. The S&P 500 ended the week above 5,400 for the first time. The Nasdaq and S&P 500 both closed at record highs for four straight days. Meanwhile, the Dow Jones Industrial Average (^DJI) slipped more than 0.7%.

A quieter week will greet investors, with no major corporate news expected and the May retail sales report topping the economic calendar. Updates on activity in the manufacturing and services sectors as well as weekly jobless claims will also be in focus.

The markets will be closed on Wednesday for the June 16 holiday.

Inflation is heading back in the right direction

The May Consumer Price Index (CPI) showed that the “core” CPI, which excludes the volatile food and energy categories, rose 0.2% month-on-month. 'other, the lowest figure since June 2023. Meanwhile, the “core” producer price index (PPI) was unchanged in May from the previous month, below economists' expectations. an increase of 0.3%.

Economists say all of this points to a positive reading in the Fed's preferred inflation gauge the Personal Spending Index (PCE) later this month.

Bank of America economist Stephen Juneau wrote that Thursday's PPI supports his view that “disinflation is the most likely path forward” and highlights an “A+ ratio” for May's core PCE. . BofA estimates that core PCE rose 0.16% month-over-month in May.

“May CPI and PPI data support our view that the Fed will cut its policy rate later this year,” Juneau wrote. “We view recent inflation data as significantly reducing the likelihood that the Fed will need to raise rates and labor market data indicating that the likelihood of a rapid rate cut is also low.”

He added: “A round of easing starting in September remains a possibility, particularly if housing sector inflation were to moderate further over the next two months. »

“Hold the Landing”

Inflation is falling and economic growth is slowing, but the Fed plans only one interest rate cut this year. A growing number of Wall Street economists worry that the central bank is treading too narrow a line with its most restrictive interest rate policy in more than two decades.

The fear among these economists is that there are already signs of a slowdown in the economy, such as a rising unemployment rate, which could quickly worsen if the Fed keeps rates high for too long. That's why investors will be closely watching the initial weekly release of jobless claims on Thursday morning. In the most recent release last week, weekly jobless claims unexpectedly reached 242,000, marking a 10-month high.

The story continues

Mohamed El-Erian, chief economic adviser at Allianz, told Yahoo Finance that the balance of risks for the Fed if it waits to cut rates in December “is in favor of it being too late.”

Neil Dutta, chief economic officer at Renaissance Macro, wrote in a note to clients that there are many reasons to believe further disinflation remains on the agenda. Dutta believes this will require a change in rhetoric from the Fed. The risk, Dutta says, is that the Fed does not change its current position.

“The bottom line is that unemployment is rising and core inflation is falling,” Dutta wrote. “The policy implications of this are clear… It’s time to take action and stick the landing.”

Retail reading

A key reading on how consumers are holding up in the face of higher rates is expected Tuesday with May's monthly retail sales report.

Economists expect retail sales to have increased 0.3% from the previous month, which would mark a rebound in spending after an unexpected stagnation in sales in April.

“We suspect that consumption is heading for a more modest pace of growth in the second half of the year,” Wells Fargo's team of economists led by Jay Bryson wrote in a note to clients on Friday. “The personal savings rate has fallen, consumer credit growth has slowed as delinquencies have risen, and growth in real disposable income has faded amid a slowing labor market.”

The economists added: “These growing headwinds have weighed on discretionary spending, which will likely limit retail sales growth in the months ahead. »

Bull market tailwind returns

After a difficult start to the year, the latest inflation data could very well fuel the current stock market rally.

“Lower inflation continues to be one of the main factors driving the bull market in equities,” wrote Julian Emanuel, who leads Evercore ISI's equities, derivatives and quantitative strategy, in a note to customers.

The S&P 500 (^GSPC) and Nasdaq (^IXIC) hit four straight closing records last week as investors digested weaker-than-expected inflation numbers for consumer and wholesale prices. The figure helped markets remain optimistic about two interest rate cuts this year, despite Federal Reserve officials' median forecast for just one cut in its June 12 Summary of Economic Projections (SEP). .

Jonathan Golub, chief U.S. equity strategist at UBS Investment Bank, which has one of the highest S&P 500 year-end targets on Wall Street at 5,600, believes this week's inflation data, and what they could mean for possible interest rate cuts, “offer even greater upside potential” for its year-end outlook.

Weekly calendar

Monday

Economic data : Empire Manufacturing, June (-13 expected, -15.6 previously)

Earnings: Lennar (LEN)

Tuesday

Economic data : Retail sales, month-on-month, May (+0.3% expected, 0% previously); Retail sales excluding auto and gasoline, May (+0.3% expected, -0.1% previously); Month-to-month industrial production, May (0.4% expected, 0% previously)

Earnings: Home KB (KBH)

Wednesday

Economic data : NAHB Real Estate Market Index, June (45 expected, 45 previously); MBA mortgage applications, week ending June 14 (+15.6%)

Earnings: The markets are closed for the June 10 holidays.

THURSDAY

Economic data : Initial unemployment claims, week ending June 15 (previously 242,000); Month-over-month housing starts, May (+1.1% expected, +5.7% previously); Building permits from one month to the next, May (+1.4% expected, -3% previously); Philadelphia Business Outlook, June (4.5 expected, 4.5 previously); Import prices, month-on-month, April (+0.2% expected, +0.4% previously)

Earnings: Accenture (ACN), Kroger (KR)

Friday

Economic data : Leading index, May (-0.3% expected, -0.6% previously); S&P US Global Manufacturing PMI, June preliminary (51 expected, 51.3 previously); S&P Global US Services PMI, June preliminary (53.4 expected, 54.8 previously); S&P Global US Composite PMI, June preliminary (previously 54.5)

Earnings: CarMax (KMX), FactSet (FDS)

Josh Schafer is a reporter for Yahoo Finance. Follow him on @_joshschafer.

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