Inflation takes center stage in the week ahead as Wall Street looks for more clues on Fed rate hikes

Published Fri, Aug 4 20231:57 PM EDTUpdated Fri, Aug 4 20234:08 PM EDT

New inflation data set for release in the week ahead could help Wall Street regain its footing. The latest read on the consumer price index — an inflation gauge that measures what consumers pay for a many goods — is due out Thursday. The July producer price index — which gauges what wholesalers pay for raw goods — is slated for Friday. If the reports show inflationary pressures are trending toward the Federal Reserve's 2% goal, the market could take it as a signal that the Fed is getting close to wrapping up its rate-hiking campaign that began last year. The June CPI and PPI reports, released mid-July, showed inflation easing. "If CPI continues to follow the PPI, which it's been, then I would say that probably removes the case for any more Fed tightening," said Jack Ablin, investment chief at Cresset Capital. "And I think that's good news for stocks." The major averages struggled this week after a Fitch downgrade weighed on investor sentiment and spurred a sell-off. The S & P 500 and Nasdaq Composite ended the week down by more than 2% each, while the Dow Jones Industrial Average fell more than 1%. Equities tried to claw back some ground Friday after somewhat cooler-than-expected July jobs data spurred shares higher, but eventually closed lower. Fed to hold or move? Broadly speaking, traders are certain the Federal Reserve is about done in its rate hiking campaign. According to the CME FedWatch tool, nearly 83% of investors are expecting the central bank to hold rates steady at its September policy meeting, while roughly 17% are betting policymakers will raise by another 25 basis points. Traders are also expecting the central bank to hold rates at the current 5.25%-5.5% range for the rest of the year. For some, a continued softening in the July inflation data could mean the market can start moving past the narrative that's dominated stocks over the last year. "I do think that the Fed has won the war on inflation," Cresset Capital's Ablin said. "And I think what investors need to start paying attention to now are interest rates. I would say that interest rates are actually better positioned to attract capital than equities right now." Ablin expects the Fed could hold rates steady for some time and is not anticipating cuts until sometime in the middle of next year. That's when he thinks large-cap growth equities can start to "move meaningfully higher." Until then, the investment chief is recommending traders buy quality companies that pay dividends, saying they're "well positioned in this market." Some of his picks include McCormick , Archer-Daniels-Midland and Chevron . Still, other market participants expect the Fed has one more rate hike left for its September meeting. CFRA'S Sam Stovall expects the central bank will hike once more to ensure it does have inflation firmly under control, and avoid repeating the mistakes of the 1970s. However, he does not expect that the inflation data releasing next week will be very threatening, even if they show a slight rise from the prior reading. Economists polled by FactSet are expecting the consumer price index rose 3.3% in July on a year-over-year basis, up from a 3% reading in June. "If those numbers are pretty much already baked into the cake, and the market continues to be higher today, well, that would imply that anything that comes in equal to or better than that would be favorable to the market's advance," Stovall said. Stronger-than-expected earnings Corporate earnings season is also winding down. Thus far, more than 80% of S & P 500 companies have reported this earnings cycle, and the results have been better than investors have feared — buoying market sentiment. AXS Investments' Greg Bassuk noted that investors should continue to pay close attention to company guidance — which has also come in stronger than expected. He noted the growing importance of artificial intelligence and other technologies that can represent further growth ahead for companies across industries. "All of a sudden the narrative changes from is tech overvalued to, you know, where across many industries can we find investment opportunities that are going to be driven by the technology advances ahead?" Bassuk said. "And we've seen that feedback coming out of the outlook and guidance that many of the companies that have reported have shared as opposed to just looking at the data of where they came in over the prior months," Bassuk added. A smattering of results will roll out in the week ahead including from major firms like the Walt Disney Company, which reports Wednesday. A peek into those results could give insight to the consumer, given Disney's exposure to travel, leisure and hospitality. Other consumer-facing companies such as casino stock Wynn Resorts will be posting results Wednesday. Other economic data Investors will digest other major economic data in the week ahead. Thursday's initial jobless claims will give insight into the strength of the U.S. economy. Friday's consumer sentiment data will also be in focus. Those data points will come amid a seasonally weak period for markets. Since 1987, August has been the worst month for the Dow and the second-worst month for the S & P 500, according to the Stock Trader's Almanac. Specifically, the almanac noted the first nine trading days of August are historically weak. Even so, traders remain bullish. "We think that the fundamentals remain very strong for market growth ahead in the next quarter or two here in 2023," AXS' Bassuk said. Week ahead calendar All times ET Monday, Aug. 7 3 p.m. Consumer Credit (June) Earnings: Tyson Foods , Paramount Tuesday, Aug. 8 6 a.m. NFIB Small Business Index (July) 8:30 a.m. Trade Balance (June) 10 a.m. Wholesale Inventories (June) Earnings: United Parcel Service , Eli Lilly, Fox , Take-Two Interactive Software Wednesday, Aug. 9 No earnings releases Earnings: Walt Disney Company , Wynn Resorts Thursday, Aug. 10 8:30 a.m. CPI (July) 8:30 a.m. Initial jobless claims (week ended Aug. 5) 8:30 a.m. Hourly earnings (July) Earnings: RL Friday, Aug. 11 8:30 a.m. PPI (July) 10 a.m. Michigan Sentiment preliminary (August)