Wall Street expects rate hikes are off the table for now. Next week’s inflation data will test that thesis

Published Fri, May 10 20243:02 PM EDTUpdated Fri, May 10 20244:10 PM EDT

Next week's inflation data will be the first major test for markets after the Federal Reserve took a dovish stance on interest rates, at a time when bond yields also look to be stabilizing. Stocks have been churning higher lately after Fed Chair Jerome Powell indicated rate hikes are likely off the table , a position that investors expect is a bullish event for equities. A strong earnings season, as well as some cooler labor data , also have investors more optimistic in this year's outlook. The Dow Jones Industrial Average on Friday registered its eighth straight day of gains, or its longest win streak going back to December, as well as its strongest week of 2024. At the same time, the 10-year Treasury yield has also pulled back from its highs, last at about 4.5% after recently topping 4.7%. .DJI 1M mountain Dow Jones Industrial Average But stocks face a key hurdle next week with the release of April's consumer price index, which is due out Wednesday. A reading that comes in line with expectations could signal further upside ahead for stocks, while a significantly hotter print could spook investors who worry Fed policymakers will have to revisit their rate expectations. "The Fed has made it clear that they think that CPI is noisy, or just inflation is noisy," said Mike Dickson, head of research and quantitative strategies at Horizon Investments, adding, "However, if inflation comes in materially higher, that'll have a pretty big impact on what the Fed is going to do." On Friday, all three major averages posted a winning week, with the 30-stock index gaining more than 2%. The S & P 500 and Nasdaq Composite were higher by more than 1%, each. The market reaction Inflation data has been crucially important this year for investors. Not only have investors tried to decipher the moves of a data-dependent Fed, but the inflation reports themselves have been less than encouraging as of late. Stocks fell from their highs of the year as investors accepted the likelihood that it may take the Fed longer to get back to its 2% inflation target. But investors are more hopeful about the upcoming slate of data, with UBS saying this week that it anticipates a "renewed fall in U.S. inflation in the coming months." The April CPI set for release next week is anticipated to show a rise of 0.4% and 3.4% on a monthly and yearly basis, respectively, according to FactSet consensus estimates. That would be from increases of 0.4% and 3.5% the prior month, respectively. Core CPI is expected to show increases of 0.3% on the month and 3.7% on the year. That would be lower from respective increases of 0.4% and 3.8% in the prior month. However, some investors say they will pay special attention to how markets react to the CPI data, more than they will to the report itself. Of note, Horizon Investments' Dickson said he will be keeping an eye on the ICE BofAML MOVE Index , a gauge that measures volatility in the fixed income market much like the CBOE Volatility Index, or VIX , tracks volatility in stocks. A reading above 100 in MOVE indicates more uncertainty in the interest rate outlook, and can be a bearish signal for equities. Recently, the MOVE index dipped back below 100 after last week's central bank meeting. But Dickson is hoping the index continues to stay relatively benign after the CPI print comes in as expected, or even a bit higher, as that would indicate the market is counting on the Fed to remain dovish. "That would be a great outcome because it would say the market has confidence in what the Fed said last week," Dickson said. "And so, that would be an important statistic to keep an eye on." 'Fear the cut, not the pause' Getting past CPI could mean further upside ahead for stocks, especially as more investors come around to the idea that a Fed pause spells good news for equities . In fact, the S & P 500 has averaged a 6% gain during previous pauses over the past 50 years, according to Jeff Buchbinder, chief equity strategist at LPL Financial. But that advance actually jumps to 13.1% on average over the last six pauses going back to 1989, as gains have accelerated in more modern market history. "Long pauses are typically good for stocks, and the gains achieved since the Fed's last hike in July 2023 are consistent with recent history," Buchbinder wrote in a recent note. Elsewhere, Strategas' Jason De Sena Trennert told investors in a note this week that they should "fear the cut, not the pause," as Fed easing is "usually associated with economic and market stress." Unless, of course, the central bank manages to achieve a soft landing. For investors hopeful the S & P 500 could 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, anticipates investors can now buy back into the megacap tech stocks, except Tesla, after their recent declines. "Big-cap tech were tested in April," Mahoney said. "But after earnings, I think … the balance sheets, the buybacks, the growth potential, the AI potential, and so on, all those headwinds are still intact." If anything, the investor said the ability of stocks to make it over the recent wall of worry could mean the gains from here on out are more sustainable. "In April, the market, I think, got hit three different times, and held on very nicely," Mahoney said. "So I think that's another reason why there's a sense of bullishness again." Consumer earnings reports are also on deck next week. Home Depot reports Tuesday, as does Charles Schwab. Walmart and Deere report 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: Progressive , Cisco Thursday May 16 8:30 a.m. Building Permits preliminary (April) 8:30 a.m. Continuing Jobless Claims (05/04) 8:30 a.m. Export Price Index (April) 8:30 a.m. Housing Starts (April) 8:30 a.m. Import Price Index (April) 8:30 a.m. Initial Claims (05/11) 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) Earnings: Take-Two Interactive Software , Applied Materials , Walmart , Deere Friday May 17 10 a.m. Leading Indicators (April)