- Rising prices are a major focus of the markets in the week ahead, as both consumer and producer price inflation measures are reported.
- Strategists say there's little to disrupt the markets' run higher for now, but inflation could eventually become a problem.
- Investors will watch a parade of central bank speakers. The Federal Reserve recently announced it would taper back its bond purchases starting this month.
Stocks could take aim at new highs in the week ahead, even as investors face fresh data that could show the highest year-over-year jump in consumer inflation in more than 30 years.
Stocks touched record levels Friday, after a monumental week that included the Federal Reserve's announcement that it will wind down its bond buying, the first big step away from the easing measures it put in place to fight the pandemic.
"The important drivers of the market, I think, remain intact — earnings and interest rates," said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management. "I think the Fed gave the equity market what it was looking for... which was an awareness of inflation without an overreaction to inflation. Meanwhile we're still digesting what's been a really strong earnings season."
The Fed expects to fully wind down its $120 billion-per-month bond purchases by the middle of next year. At that point some economists expect the central bank to start raising interest rates. Fed Chairman Jerome Powell assured markets the central bank still sees inflation as temporary, but that if it proves to be hotter, the Fed would act.
"I think investors are sounding the all-clear for the equities market here, at least in the short-term, and it's hard to argue with. We have more concerns when you take a six-month view," said David Donabedian, chief investment officer of CIBC Private Wealth Management.
"The biggest concern is inflation which we don't think is transitory," he added. "I would look for a rate hike almost immediately after the tapering process is done which is mid-2022."
Donabedian said the concern is that sticky inflation could force the Fed to move sooner to raise interest rates to battle rising prices.
The producer price index and consumer price index are reported Tuesday and Wednesday, respectively. Economists expect both reports to remain elevated for October. Headline PPI is expected to rise 0.6%, according to Dow Jones.
CPI is expected to be the hottest post-pandemic print yet. Headline CPI inflation is expected to rise by 0.6% or 5.9% year-over-year, the fastest pace since December 1990. Core inflation, excluding energy and food, is expected to rise 4.3% year-over-year.
"The acceleration in shelter costs is stunning so if you get that, along with energy price increases, we could see a 5.7% [headline gain]," said Diane Swonk, chief economist at Grant Thornton.
Steve Sosnick, chief strategist at Interactive Brokers, said markets are already expecting the elevated inflation prints.
"Markets right now have a certain amount of tunnel vision. Easy money will continue for awhile and even though the Fed has told us they're not refilling the punch bowl, the party is going to go on for quite some time," he said. "Right now the path of least resistance is higher."
Fed officials not on same page
Central bank speakers will also be a highlight in the week ahead, with Fed Chairman Jerome Powell appearing at two events. On Monday, he is at a Fed conference on gender and the economy. He speaks Tuesday at a virtual conference on diversity and inclusion in economics, finance and central banking, co-hosted by the Federal Reserve Board, Bank of Canada, Bank of England and European Central Bank.
There are plenty of other Fed officials speaking as well, including Fed Vice Chairman Richard Clarida, New York Fed President John Williams and San Francisco Fed President Mary Daly.
CIBC's Donabedian said the group of speakers could be important, and it will be key to listen for nuances to their views on rising prices. "You do get some different twists on inflation. While it's not going to look like an FOMC feud at all, it will look like members are not on the same page on inflation," he said.
Investors will also be watching Congress for any progress on the Biden spending plan, which is meeting opposition in the Senate.
"It looks like we're going to get some sort of vote in the House on the two big fiscal packages," said Donabedian. He said he expects the House to pass both, and the infrastructure bill should be signed into law.
"It does leave open whether the Senate is going to want to make major change to the social spending bill, and there's a chance that that flops," he said, noting it has less than a 50% chance of failing.
The earnings season is winding down but there are still a number of reports in the coming week, including The Walt Disney Company on Wednesday.
Week ahead calendar
9:00 a.m. Fed Vice Chairman Richard H. Clarida
10:00 a.m. Boston Fed President Kenneth Montgomery
10:30 a.m. Fed Chairman Jerome Powell at conference on gender and economy, hosted by Fed
10:55 a.m. New York Fed President John Williams
12:00 p.m. Fed Governor Michelle Bowman
12:00 p.m. Philadelphia Fed President Patrick Harker
1:50 p.m. Chicago Fed President Charles Evans
2:00 p.m. Senior loan officers survey
6:00 a.m. NFIB survey
7:50 a.m. St. Louis Fed President James Bullard
8:30 a.m. PPI
9:00 a.m. Fed Chairman Powell at conference on Diversity and Inclusion in Economics, Finance, and Central Banking, co-hosted by the Federal Reserve Board, Bank of Canada, Bank of England, and European Central Bank
11:35 a.m. San Francisco Fed President Mary Daly
1:30 p.m. Minneapolis Fed President Neel Kashkari
8:30 a.m. Initial jobless claims
8:30 a.m. CPI
10:00 a.m. Wholesale trade
2:00 p.m. Federal budget
Bond market closed
10:00 a.m. Consumer sentiment
10:00 a.m. JOLTS
12:10 p.m. New York Fed's John Williams