Important inflation data and big bank earnings could create volatility for markets in week ahead

Published Fri, Jan 6 20233:59 PM ESTUpdated Sun, Jan 8 202311:50 PM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

Major banks kick off the earnings season in the week ahead, but it may be news on inflation that drives markets after hopes for a slowing trend triggered a major stock rally Friday. Stocks closed out the first week of the year with gains, boosted into the green by Friday's more than 2% jump in major indices. "Next week is all about inflation," said Michael Arone, chief investment strategist at States Street Global Advisors. "I would expect another volatile week. It'll be interesting in that each data piece that comes in and suggests we're moving toward the Fed's 2% inflation goal will be celebrated, and for data that refutes that, markets will act negatively." The first major day of the fourth-quarter earnings season is Friday when major banks including JPMorgan Chase and Bank of America report. "What they have to say about earnings will also set the tone in terms of what the earnings season will look like," Arone said. Federal Reserve officials will also be important to watch in the coming week. Chairman Jerome Powell speaks on central bank independence at a Riksbank symposium in Stockholm Tuesday at 9 a.m. ET. Other speakers include Atlanta Fed President Raphael Bostic Monday. On Thursday, Philadelphia Fed President Patrick Harker, Richmond Fed President Tom Barkin and St. Louis Fed President Bullard all speak at separate events. Minneapolis Fed President Neel Kashkari and Boston Fed President Susan Collins have appearances Friday. Inflation watch Friday's December employment report showed that wage gains slowed last month to 4.6% on an annual basis, less than the 5% economists expected. That started a rally Friday morning that continued after the ISM nonmanufacturing survey showed a surprise contraction in services sector activity and slower price increases. Both reports encouraged investors to expect the Fed could pause its rate hikes sooner. The most important inflation report in the week ahead is the consumer price index, released Thursday. But Arone said he is also watching the New York Fed's Survey of Consumer Expectations on Monday for an important glimpse at now consumers see future inflation. Friday's University of Michigan consumer sentiment survey also measures inflation expectations. Economists expect the consumer price index to be unchanged for December but up 6.5% year-over-year, compared to a 0.1% gain in November and a 7.1% annual pace, according to Dow Jones. Excluding energy and food, the CPI is expected to rise 0.3% or 5.7% on an annual basis, compared to November's 0.2% and 6%, respectively. "Most of the payback is coming from non-monetary things like energy prices and a reversal of goods prices," said Michael Gapen, chief U.S. economist at Bank of America. "What we're left with is where there's services inflation, which is still too strong." For instance, Gapen said he expects core goods inflation in the report to decline by a half percentage point, while core services should rise by 0.5%. "The argument would be the payback in goods, that's a pandemic story," he said. "When that stuff washes out, where we are is services inflation is running at 6%. Some of that is due to the labor markets, so labor markets are going to cool." Gapen expects the labor market to slow much more than it has. In December, there was a stronger than expected the 223,000 jobs added even though wage pressures eased. Earnings ahead A group of major financials including Wells Fargo, Citigroup and BlackRock reports results Friday. Analysts generally expect to see earnings expectations come down for many companies, and some see a volatile stock market as a result. "I expect the rate of earnings growth will come down, revenue growth will come down. That's already reflected and expected," Arone said. "It's going to be more about what the corporate executives say about the future, in terms of what they're seeing. I expect corporate executives to be cautious and to be warning about the environment." Arone said he doesn't necessarily see the negative first quarter for stocks that many strategists expect. "I'm in the camp that the economic data, the earnings data and eventually the jobs data are going to worsen. I do think that's going to happen in the first half," he said. "However, I actually think markets may react positively to this idea that the most anticipated recession is finally kind of here, and it will slow the Fed down and make them stop and we can move forward. Investors will look ahead to the recovery." The S & P 500 ended the week the week with a 1.5% gain at 3,895. The index rallied 2.3% Friday, while bond yields fell. Yields move opposite price. The 10-year Treasury yield was at 3.56%. Week ahead calendar Monday Earnings: Commercial Metals, Accolade, PriceSmart, WD-40, Jefferies Financial 11:00 a.m. New York Fed Survey of Consumer Expectations 12:30 p.m. Atlanta Fed President Raphael Bostic 3:00 p.m. Consumer credit Tuesday 6:00 a.m. NFIB survey 9:00 a.m. Fed Chairman Jerome Powell in Stockholm on central bank independence 10:00 a.m. Wholesale trade Wednesday Earnings: KB Home Thursday Earnings: Infosys , Taiwan Semiconductor 7:30 a.m. Philadelphia Fed President Patrick Harker 8:30 a.m. Weekly jobless claims 8:30 a.m. CPI 11:30 a.m. St. Louis Fed President James Bullard 12:40 p.m. Richmond Fed President Tom Barkin 2:00 p.m. Federal budget Friday Earnings: JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Bank of New York Mellon, First Republic Bank, UnitedHealth, BlackRock, Delta Airlines 8:30 a.m. Import prices 10:00 a.m. Consumer sentiment 10:00 a.m. Minneapolis Fed President Neel Kashkari 10:20 a.m. Philadelphia Fed's Harker 9:00 a.m. Boston Fed President Susan Collins