A couple of key inflation numbers in the coming week could bolster the case for a September rate cut as investors weigh how long stocks can sustain their rally to record highs. After a rocky start to the year, a recent improving inflation picture has investors hopeful that the Federal Reserve could begin cutting rates soon. While the central bank’s latest “dot plot” of individual projections suggested it would cut just a quarter of a percentage point in 2024, markets are currently pricing in two, with the first in September, according to the CME FedWatch Tool. Those hopes have only recently grown amid signs of a cooling — but not breaking — labor market. On Friday, the June nonfarm employment report, for example, showed the U.S. economy added more jobs than economists had expected. But it also showed an unexpected jump in the unemployment rate, from 4% to 4.1%, the highest level since October 2021. Next week’s inflation data is generally expected to show that story holding up. If the consumer and producer price indices, which are due out Thursday and Friday respectively, continue to show waning price pressures, that could further increase the likelihood that the central bank can ease monetary policy. That would be a positive development for investors who are worried that the stock market rally will fizzle out quickly. “Any positive movement would obviously have a very strong impact on the market,” said Mark Malek, Chief Investment Officer at SiebertNXT. “Everyone is looking for [a] continuing trend, downward trend, in inflation. So that's something we're going to be watching very, very closely.” .SPX YTD mountain S&P 500 On Friday, the S&P 500 was up 2% for the week, marking its fourth winning week in the last five. The Dow Jones Industrial Average was up 0.7%, while the Nasdaq Composite rose 3.5%. Stubborn inflation stains The June consumer price index is expected to show a slight improvement in the headline figure. Economists polled by FactSet expect the CPI to have risen 3.1% on an annualized basis last month, down from the 3.3% increase it recorded the previous month. But investors will pay particular attention to any improvement in core services, particularly the cost of housing, where inflation has been particularly stubborn — even as other higher-frequency housing data outside the CPI has indicated softness. In May, for example, housing inflation rose 0.4% on a monthly basis and 5.4% on a year-over-year, while other key items declined. “I think there's been a surprise with how slowly the moderation in a lot of the real-time housing metrics has kind of trickled down into the CPI readings with shelter inflation,” said Ross Mayfield, investment strategy analyst at Baird. “If there's a catch where the shelter CPI, the owner rent, is kind of a catch to what we're seeing in Zillow or Apartment List or some of the other real-time rent metrics, there could be some downward or unexpected downward pressure on the CPI.” “I don't know if it's going to be this month, but I think there's going to be a month where that happens,” Mayfield added. “If you [get] CPI below 3%, I think it's going to be a real risk-on moment for markets.” Investors will also be watching Friday's producer price index, which gave stocks a boost last month after the latest reading showed unexpected signs of disinflation. The PPI is a measure of wholesale prices received by domestic producers and can be seen as a leading indicator of where inflation is headed. The June PPI is expected to show a modest increase. Economists polled by FactSet expect it to have risen 2.3% in June, up from 2.2% in the previous reading. Elsewhere, the University of Michigan's sentiment indicator, due out next Friday, will give investors insight into how consumers feel about the economy, including their expectations around inflation. Stick to winners or diversify Next week's busy schedule is coming as the S&P 500 continues to post record highs, albeit during a holiday-shortened trading week that is typically marked by lower trading volume. The broader index has now registered a gain of more than 16% through 2024. Investors are worried that a sell-off is coming, but many disagree about how to position their portfolios going forward. Some see now as the time to stick with the market leaders, the mega-cap tech stocks that have both rosy growth prospects thanks to optimism around artificial intelligence and fortress balance sheets that make them defensive picks in an uncertain economic outlook. Others, however, say it’s time for investors to start diversifying their bets in case of a pullback, especially those with long-term time horizons who are concerned about current valuations. “Markets have become concentrated, but a lot of portfolios have become concentrated, so it’s important to be diversified,” David Kelly, chief global strategist at JPMorgan Asset Management, told CNBC’s “Squawk on the Street” on Friday. “Not because we see an imminent threat, but because eventually something is going to go wrong.” Second-quarter earnings season also kicks off next week with some big bank results. Citigroup, Wells Fargo and JPMorgan Chase are all set to report. PepsiCo and Delta Air Lines will also give investors consumer insights on Thursday. Week Ahead Calendar All times ET. Monday, July 8 3:00 p.m. Consumer Credit (May) Tuesday, July 9 6:00 a.m. NFIB Small Business Index (June) Wednesday, July 10 10:00 a.m. Wholesale Inventories Final (May) Thursday, July 11 8:30 a.m. Consumer Price Index (June) 8:30 a.m. Initial Claims (07/06) 2:00 p.m. Treasury Budget (June) Earnings: Delta Air Lines, PepsiCo, Conagra Friday, July 12 8:30 a.m. Producer Price Index (June) 10:00 a.m. Preliminary Michigan Sentiment (July) Earnings: Citigroup, Wells Fargo, JPMorgan Chase, Fastenal, Bank of New York Mellon
