A package of economic data awaits Wall Street this week as investors move closer to the Federal Reserve’s last interest rate meeting of the year.
Fresh readings of the Producer Price Index (PPI) – which measures inflation at the wholesale level -, durable goods orders and consumer sentiment all add importance to the economic calendar. Meanwhile, a few more earnings reports will close the curtain on the third-quarter earnings season.
Federal Reserve officials are scheduled to meet Dec. 13-14 and are expected to raise their benchmark interest rate by 50 basis points. Federal Reserve members have entered a lockdown before the convention, restricting public speaking before policy sessions.
Among the data releases most closely monitored for clues from the Fed are the monthly jobs report, which beat expectations for November on Friday, and the consumer price index data — due December 13 — as they are two of the most comprehensive economic releases to come used by officials to set policy. Until the new CPI data comes out, a measure of producer prices will give traders another look at where inflation is headed.
Economists polled by Bloomberg expect the PPI to rise 0.2% in November, up from the previous month’s level, while it eased to 7.1% on an annual basis over the period from 8.0%. The core PPI, which excludes the volatile food and energy components, is likely to have risen by the same monthly margin as the headline while falling to 6.7% from 5.8% year-on-year.
The inflation picture might have been different had the US not narrowly avoided a nationwide strike by railroad workers, a disruption that was expected to have devastated the economy and hit wholesalers particularly hard after Congress hastily passed legislation on terms of a tentative agreement reached in September.
As of today, the forecast for a 50 basis point rate hike next week is shared by markets and Wall Street megabanks, especially after Fed Chair Jerome Powell broadly endorsed that view during a speech in Washington DC on Wednesday
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“Monetary policy is affecting the economy and inflation with an uncertain lag, and the full impact of our rapid tightening to date is yet to be felt,” he said. “Therefore, it makes sense to slow the pace of our rate hikes as we approach the level of restraint sufficient to bring down inflation.”
Powell added that “the time to slow the pace of rate hikes could come as early as the December meeting.”
WASHINGTON, DC – NOVEMBER 30: Fed Chair Jerome Powell looks at notes while speaking at the Brookings Institution in Washington, DC. (Photo by Drew Angerer/Getty Images)
And while expectations for a cut from the 0.75% hikes seen over the past four sessions are largely priced in, investors are now wondering how much longer the central bank’s tightening campaign will last, how high and how long the federal funds rate will stay there before making any cuts.
Bank of America forecasts the final interest rate to range from 5.00% to 5.25%, a view shared by many of its megabank peers, although speaking to reporters last week, BofA chief economist Michael Gapen speculated that the interest rate could rise up to 6% due to the enormous dynamics of the labor market.
“The risks to our Fed policy outlook are skewed toward higher terminal rates given the ongoing labor supply/demand imbalance,” Bofa strategists led by Gapen said in a note released Friday after the Hot Jobs report was published in November. “From a risk management perspective, a slower pace of rate hikes seems appropriate, but the strength of labor markets likely means, in our view, that the Fed needs to do more, not less, to get inflation on a sustained downward trend.”
With rates seemingly slowing and an eventual pause, Wall Street’s attention has turned to the longer-term impact of a higher interest rate environment on growth. In weekly commentary, Baird’s Ross Mayfield and Nicholas Bohnsack, president and head of portfolio strategy at Strategas, a Baird company, predicted that even with a sustained downward trend in inflation, the cost of reaching 4% levels would affect long-term price stability Federal Reserve 2% target becomes ‘increasingly higher’.
“There would likely be significant corporate and labor market restructuring,” a note said. “Ultimately, we think they slow the pace at which they raise rates and then take a long time to observe the landscape and the potential impact.”
That view was shared by BlackRock’s chief executive officer, Larry Fink, who told a conference last week that he was confident inflation would come down – just not to the 2% mark and amid a period of economic stagnation.
At Wednesday’s Dealbook summit in New York, Fink expressed fears of waking up to a world of “2% to 3%” interest rates and “3% to 4%” inflation.
Elsewhere in the coming week, an OPEC+ meeting this weekend will put energy markets in focus. The oil cartel agreed to maintain current production levels to assess the global oil market amid uncertainty over China and Russia looming over the commodity. The US on Friday joined the European Union, the Group of Seven and Australia in capping the price of Russian oil at $60 a barrel.
Headliners set to round out the season include Campbell Soup (CPB), GameStop (GME), Broadcom (AVGO), Chewy (CHWY), Lululemon Athletica (LULU) and Oracle (ORCL).
While the third quarter delivered results that were mostly better than feared, Wall Street strategists have warned of zero earnings growth ahead.
S&P 500 Bottom-up EPS Estimates: Sept 30 – Nov 30 (Source: FactSet Research)
In October and November, according to data from FactSet Research, analysts lowered earnings estimates for S&P 500 companies for the fourth quarter by more than average. The bottom-up estimate of earnings per share for the fourth quarter fell 5.6% to $54.58 from $57.79 between September 30 and November 30.
“There’s something to be said for the idea that inflation creates this money illusion, where sales and profit levels remain elevated simply because prices are higher, especially compared to what is considered a normal recession-related earnings decline could.” Mayfield and Bohnsack also said in their weekly note. “If you factor that in, it looks like the economy won’t be hurt as badly.”
Consequently, they added: “We are very focused on company profit margins and profitability levels and that’s where we’ve started to see some real acute pain across the landscape. We expect earnings estimates to continue falling as the company forecast softens and costs continue to rise.”
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economic calendar
Monday: S&P Global US Services PMINovember final (46.1 expected, 46.1 last month); S&P Global US Composite PMINovember final (46.3 in previous month); factory ordersOctober (0.7% expected, 0.3% mom); Durable Goods OrdersOctober final (1.0% in previous month); Commodities without transportOctober final (0.5% expected, 0.5% mom); Non-defense capital goods orders excluding aircraftOctober final (0.7% in previous month); Supplies of non-defense capital goods, except aircraftOctober final (1.3% in the previous month); ISM Service IndexNovember (53.5 expected, 54.4 last month)
Tuesday: trade balanceOctober (-$77.0 billion, $73.3 billion expected)
Wednesday: MBA Mortgage Applicationsweek ending December 2 (-0.8% in previous week); productivity outside of agricultureQ3 final (0.3% expected, 0.3% qoq); unit labor costsQ3 final (3.5% expected, 3.5% qoq); consumer creditOctober ($26.5 trillion expected, $24.976 last month)
Thursday: Initial jobless claimsweek ended December 3 (225,000 in previous week); Ongoing ClaimsWeek ending November 26 (1.608 million in previous week)
Friday: Final PPI demandmom, November (0.2% exp., 0.2% mom); PPI without food and energymom, November (0.2% exp., 0.2% mom); PPI excluding food, energy and trademom, November (0.2% exp., 0.2% mom); Final PPI demandYoY, November (7.1% expected, 8.0% mom); PPI without food and energyYoY, November (5.8% expected, 6.7% mom); PPI excluding food, energy and tradeYoY, November (5.4% MoM); wholesale salesMoM, October (0.4% MoM); Wholesale Stocksmonth-over-month, end-October (0.8% in previous month); vibes university of michigan, December preliminary (56.8 expected, 56.8 last month)
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results calendar
Monday: GitLab (GTLB), Sumo Logic (SUMO)
Tuesday: AeroVironment (AVAV), AutoZone (AZO), Casey’s General (CASY), Conn’s (CONN), Dave & Buster’s (PLAY), MongoDB (MDB), Signet Jewelers (SIG), Stitch Fix (SFIX), Smith & Wesson Brands ( SWBI), Toll Brothers (TOL)
Wednesday: Brown-Forman (BF.B), Campbell Soup (CPB), C3.ai (AI), GameStop (GME), Korn/Ferry (KFY), Lovesac (LOVE), Ollie’s Bargain Outlet (OLLI), Sportsman’s Warehouse (SPWH ), Thor Industries (THO), United Natural Foods (UNFI), Verint Systems (VRNT)
Thursday: Broadcom (AVGO), Chewy (CHWY), Ciena (CIEN), Costco Wholesale (COST), DocuSign (DOCU), Domo (DOMO), Hello Group (MOMO), Lululemon Athletica (LULU), National Beverage (FIZZ), RH (RH), Vail Resorts (MTN)
Friday: Li Auto (LI), Oracle (ORCL)
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Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc
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