The Fed's Preferred Inflation Indicator and Nike Earnings: What to Know This Week

This is the conclusion of today’s Morning Brief, which you can read Log in Delivered to your inbox every morning, along with:

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Morning snapshot

A new reading of the Fed’s preferred inflation measure will test the market rally in the coming week.

The November Personal Consumption Expenditure (PCE) price index is scheduled to be released on Friday as economists expect inflation to continue falling. The economic calendar will also include updates on housing construction, consumer confidence and the final reading of economic growth in the third quarter.

On the corporate side, Nike (NKE), FedEx (FDX), General Mills (GIS), Micron (MU), and Carnival (CCL) are expected to report quarterly results.

The S&P 500 opens Monday after closing higher for seven straight weeks, its longest rise since 2017. Stocks rose sharply after the Federal Reserve’s latest meeting led investors to expect more interest rate cuts next year expected than previously expected.

Last week, the Nasdaq Composite (^IXIC), the S&P 500 (^GSPC) and the Dow Jones Industrial Average (^DJI) all rose over 2% as the Dow Jones broke 37,000 for the first time ever.

Inflation in focus

Key to the Fed’s call for further rate cuts in 2024 is the central bank’s belief that inflation will fall to its 2% target more quickly than previously hoped. In the Fed’s latest Summary of Economic Outlook (SEP), the central bank said it now expects core PCE, which excludes the volatile food and energy categories, to fall to 2.4% next year. Inflation was previously expected to be 2.6% at the end of 2024.

“Inflation continues to fall,” Fed Chairman Jerome Powell said during a press conference on December 13th. “The labor market is always coming back into balance. And it’s been so good so far, although we kind of expect it’s going to get more difficult from here on out,” but so far that’s not the case.

Powell noted that inflation remains above the Fed’s 2 percent target and how far inflation is above that target will be announced Friday with the latest PCE report.

The story goes on

Economists expect an annual “core” PCE – which excludes the volatile food and energy categories was 3.4% in November. For the previous month, most economists expect a “core” PCE of 0.2%.

“November PCE inflation should see a significant decline,” U.S. economist Michael Gapen of Bank of America wrote in a research note on Friday. “We essentially only expect an increase of 0.1%.”

He added: “All in all, it should be another arrow in the Fed’s quiver that inflation pressures are easing.”

Stocks shed light on the consumer

In corporate news, quarterly reports from Nike, FedEx, General Mills and Carnival will provide insights into the state of consumer spending, which many expect to slow through 2024.

Nike and FedEx, in particular, will also offer investors an early glimpse into holiday shopping demand as their reporting quarters ended November 30 and their current quarter forecasts will reflect the entire holiday season.

“We believe the U.S. wholesale sector remains under pressure,” UBS analyst Jay Sole wrote in a research note previewing Nike’s earnings. “Inventories are still high and consumers are becoming more price sensitive. The incremental insights compared to 90 days ago show that retailers are taking longer than expected to clear inventory.”

He continued: “We expect difficult macroeconomic trends to continue as inflation continues to negatively impact consumers, pandemic-era savings are depleted and higher interest rates weigh on consumer spending.”

Indices and ETFs to keep an eye on

Broadly speaking, the stock market rally will also be in focus. The S&P 500 is within striking distance of its all-time high after the Dow recently set a new record of its own.

The market’s trend of pricing in further rate cuts in 2024 sent rate-sensitive sectors soaring last week.

The real estate sector led the market move, gaining about 5% over the week. The Russell 2000 (^RUT), which lost all of its post-pandemic gains earlier this year on fears of higher interest rates, also rose about 5%, while the S&P Regional Bank Index (KRE) rose nearly 8%.

For some, this is crucial to building a sustainable stock rally as many Wall Street strategists have called for breadth amid a bull market driven largely by the “Magnificent Seven” stocks.

Michael Kantrowitz, chief investment strategist at Piper Sandler, noted that the rise in the Russell 2000 was a sign that the “Fed pivot relief rally is well underway” and may have more room to run.

“A Fed reversal has clearly had bullish precedence in the past,” Kantrowitz wrote in a research note on Thursday. “We therefore assume that the breadth of the market will continue to improve.”

Kantrowitz expects stock prices to rise while bond yields fall. A key headwind to this would be if there were cracks in the labor market. Kantrowitz is monitoring initial jobless claims, which were most recently at 202,000. He believes claims need to stay below about 275,000 to reflect a healthy economy.

FILE - A sign at the intersection of Broad Street and Wall Street is seen in front of the New York Stock Exchange in New York on Monday, December 11, 2023.  A powerful rally on Wall Street lifted the Dow Jones Industrial Average to a record high after the Federal Reserve suggested the interest rate cuts investors have longed for could come next year.  (AP Photo/Yuki Iwamura, File)FILE - A sign at the intersection of Broad Street and Wall Street is seen in front of the New York Stock Exchange in New York on Monday, December 11, 2023.  A powerful rally on Wall Street lifted the Dow Jones Industrial Average to a record high after the Federal Reserve suggested the interest rate cuts investors have longed for could come next year.  (AP Photo/Yuki Iwamura, File)

FILE – A sign at the intersection of Broad Street and Wall Street is seen in front of the New York Stock Exchange in New York on Monday, December 11, 2023. A strong rally on Wall Street lifted the Dow Jones Industrial Average to a record high after the Federal Reserve indicated that the rate cuts investors have longed for could come next year. (AP Photo/Yuki Iwamura, File) (ASSOCIATED PRESS)

Weekly calendar

Monday

  • Economic data: New York Fed Services business activity, December (-11.9 previous)

  • Merits: No significant income.

Tuesday

  • Economic data: Start of construction, November (1.36 million expected, 1.37 million previously); Building permits, November (1.47 million expected, 1.49 million expected)

  • Merits: Accenture (ACN), FedEx (FDX)

Wednesday

  • Economic data: MBA mortgage applications, week ending December 15 (+7.4% prior); Existing Home Sales, November (3.77 million expected, 3.79 previous); Conference Board Consumer Confidence, December (104 expected, 102 ahead);

  • Merits: Blackberry (BB), General Mills (GIS), Micron (MU)

Thursday

  • Economic data: Initial jobless claims, week ending December 16 (215,000 expected, previously 202,000); Continuing Jobless Claims, Week Ended December 9 (1.88 million expected, 1.88 million expected); Third quarter GDP final estimate (+5.2% annualized expected, +5.2% previous); Third quarter personal consumption final estimate (+3.6% annualized expected; previously +3.6%); Philadelphia Fed December Business Outlook (-3 expected, previously -5.9)

  • Merits: Karmax (KMX), Carnival (CCL), Nike (NKE)

Friday

  • Business News: Personal income month-on-month, November (+0.4% expected, +0.2% previous); Personal spending month-on-month, November (+0.3% expected, +0.2% previous); PCE inflation month-on-month, November (+0.0% expected, +0.0% previous); PCE Inflation YoY, November (+2.8% expected, +3% prior); “Core” PCE, month-on-month, November (+0.2% expected, +0.2% previous); “Core” PCE, YoY, November (+3.4% expected; +3.5% prior); New Home Sales, November (annualized rate of 687,000 expected, previously 679,000); New Home Sales MoM, November (+1.1% Expected, -5.6% Previous); Durable goods orders, November (2.2% expected, -5.4% previous); Consumer sentiment at the University of Michigan, final in December (69.4 expected, previously 69.4)

  • Merits: No significant income

Josh Schafer is a reporter for Yahoo Finance.

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