Wall Street gets key inflation data next week amid concerns the stock market is overbought

Published Fri, Apr 5 20243:17 PM EDTUpdated Fri, Apr 5 20244:20 PM EDT

How the Federal Reserve will proceed with interest rate policy will be top of mind for investors next week when the latest inflation numbers are reported. That price data comes at a tricky time as markets attempt to maneuver around rising Treasury yields. Stocks rallied on Friday after parts of the March jobs report assured investors the central bank remains on track to cut rates this year. The number of jobs added to the U.S. economy in March blew past expectations, underscoring the labor market's strength. But average hourly earnings matched forecasts, suggesting the labor market, and the broader economy, aren't really overheating. Currently, the CME FedWatch Tool shows markets are pricing in three rate cuts this year, starting in June. But Wall Street will gain greater insight next week into what the Fed governors are looking at when March consumer and producer price indexes are released. Investors have mostly shrugged off recent reports suggesting inflation is stickier than anticipated, saying much of the uptick in January , for example, was attributable to seasonal factors. March numbers could confirm for investors whether inflation is indeed heading toward the Fed's 2% target, or if they need to revisit their base case assumptions for interest rates. A strong inflation reading next week could throw a wrench into this year's extraordinary equity rally, especially as concern mounts that the market is overbought. IEF YTD mountain Price of iShares 7-10 Year Treasury Bond ETF this year. "A lot of the momentum and breadth from Q4 and Q1 are pretty bullish signposts, but we're also pretty stretched here in the near term," said Ross Mayfield, investment strategy analyst at Baird. "Sentiment is bullish, positioning is pretty aggressive. The market continues to take rate cuts out of the picture. And so, I think in the absence of an upside catalyst, a push higher in yields could be a problem for the equity market in the near term." "I would expect a little more volatility, certainly than we saw in Q1, and potentially a minor correction here," Mayfield added. On Friday, stock benchmarks registered a losing week amid spiking oil prices and rising Treasury yields. The Dow Jones Industrial Average closed lower by 2.3% on the week, while the S & P 500 and Nasdaq Composite fell by about 1% and 0.8%, respectively. West Texas Intermediate crude oil futures topped $87 a barrel this week, reaching a five-month high. The 10-year Treasury yield hit 4.4% on Friday, up from 4.2% last week. Meanwhile, investor sentiment surveys were looking stretched. .SPX mountain 2023-10-31 The S & P 500 since late October. Near-term pressure Forecasts for next week's data point to Wall Street expecting continued progress in the fight against inflation. Economists polled by FactSet anticipate the March consumer price index will show prices rising by 0.3% on a monthly basis, less than February's 0.4% advance. Similarly, the March producer price index is expected to show an increase of 0.5%, according to FactSet consensus estimates. That's lower than the 0.6% gain in prior month. But some investors remain concerned inflation could pick up in the months ahead of the June Fed meeting, which could alter market expectations for interest rates. Hedge fund manager David Einhorn told CNBC's Scott Wapner this week he anticipates inflation to reaccelerate , noting he's made gold, a safe haven asset, a large position in his portfolio. On Friday, Fed Governor Michelle Bowman said that another rate hike , not a cut, could be needed if inflation remains sticky. Others are concerned that recent signals point to a stock market that's in for a near-term correction. Bespoke Investment Group found that sentiment is at historically high levels, with the bull-bear spread measured by Investors Intelligence and the American Association of Individual Investors in the 96th percentile, measured by data going back to 1997. Historically, high readings means lackluster future returns, Bespoke found. On average, stocks typically fall slightly after the bullish reading, it said. Over the next three months, they average a 1 percentage point gain. Over the next year, they notch an average advance of almost three percentage points. Constructive upside Regardless, many investors remain optimistic that stocks can continue to rise, citing a recent broadening out in the rally and a resilient economy as constructive signals for markets. U.S. Bank's Tom Hainlin has a 5,520 year-end target on the S & P 500, preferring U.S. equities over non-U.S., and large cap companies over small cap. He anticipates that more stocks participating in the up move will benefit sectors such as materials and energy. "We would say we're still optimistic about more of a melt up in equity prices," Hainlin said. "And that's based on durability of earnings estimates for the year." Jamie Myers, securities analyst at Laffer Tengler, is also positive on equities. He spies opportunities in dividend growth stocks, saying investors should choose companies that have recently hiked dividends, such as Walmart . The move signals management confidence in future earnings. Next week will also bring the start of the first quarter earnings season. Next Friday, results from the country's largest banks, from Citigroup to JPMorgan Chase to Wells Fargo , are on deck. Minutes from the most recent Federal Open Market Committee meeting are also due next Wednesday. Week ahead calendar All times ET. Monday April 8 Tuesday April 9 6 a.m. NFIB Small Business Index (March) Wednesday April 10 8:30 a.m. Consumer Price Index (CPI) (March) 8:30 a.m. Hourly Earnings final (March) 8:30 a.m. Average Workweek final (March) 10 a.m. Wholesale Inventories final (February) 2 p.m. Treasury Budget NSA (March) 2 p.m. FOMC Minutes Earnings: Delta Air Lines Thursday April 11 8:30 a.m. Continuing Jobless Claims (3/30) 8:30 a.m. Initial Claims (04/06) 8:30 a.m. Producer Price Index PPI Earnings: CarMax Friday April 12 8:30 a.m. Export Price Index (March) 8:30 a.m. Import Price Index (March) 10 a.m. Michigan Sentiment preliminary (April) Earnings: State Street , Wells Fargo , JPMorgan Chase , Progressive , Citigroup