Inflation and consumer spending updates ahead: What to know this week

Stocks rallied during a quiet week for economic data on Wall Street.

The Nasdaq Composite (^IXIC) rose just under 1% while the S&P 500 (^GSPC) popped almost 2%. The S&P 500 ended Friday back above 5,200 for the first time since early April. Meanwhile, the Dow Jones Industrial Average (^DJI) rose more than 2% on the week and has closed higher for eight straight sessions.

In the week ahead, a crucial April inflation reading and an update on retail sales will highlight the economic calendar. Initial jobless claims will also be in focus after the weekly data set hit a surprise nine-month high in the first week of May.

On the corporate side, Walmart (WMT), Home Depot (HD), and Alibaba (BABA) lead a quieter week of quarterly reports as earnings season slows down.

Price check

Stickier-than-expected inflation reports headlined the first quarter of economic data, prompting investors to scale back expectations for Federal Reserve interest rate cuts in 2024.

On Wednesday, investors will get their first look at whether this trend continued into the second quarter with the release of the April Consumer Price Index (CPI). Wall Street expects an annual gain of 3.4% for headline CPI, which includes the price of food and energy, a decrease from the 3.5% headline number in March. Prices are set to rise 0.4% on a month-over-month basis, in line with March's rise.

On a "core" basis, which strips out the food and energy prices, inflation is expected to have risen 3.6% year over year, a slowdown from the 3.8% increase seen in March. Monthly core price increases are expected to clock in at 0.3%, down from 0.4% in the prior month.

Morgan Stanley's economics team led by Ellen Zentner wrote in a research note that it believes inflation's descent "begins" with the April CPI report, led by easing price pressures in car insurance, rent, and healthcare. This, Zentner's team argues, could keep three Fed interest rate cuts on the table this year.

"Weaker monthly prints ahead with faster disinflation starting in [the second half of 2024] provides the Fed the confidence it needs that inflation is on a sustained path toward target," the Morgan Stanley team wrote.

This would likely be a welcome sign for markets, according to Fundstrat's head of research Tom Lee.

"We think April CPI could push higher the number of Fed cuts [priced into the market]," Lee wrote in a note to clients on Friday. This, Lee said, would be a "positive for stocks."

Entering the week, markets are currently pricing in less than two interest rate cuts this year, per Bloomberg Data.

Retail reading

With the Fed holding interest rates high for longer, economists continue to watch closely for any signs that the resilience in consumer spending is dwindling.

A fresh reading on that trend is set to greet investors on Wednesday with the April retail sales report. Economists expect that retail sales increased 0.4% in April from the prior month, down from a 0.7% increase seen in March.

Investors will also be closely watching results from Home Depot (Tuesday) and Walmart (Thursday) for signs of how the US consumer is holding up. Thus far, results from corporates have provided mixed results on how Americans are spending.

"Spending data have continued to surprise to the upside, but we get the sense households are increasingly prioritizing purchases," Wells Fargo's team of economists wrote in a weekly research note. "Although volatile, non-discretionary categories have outpaced discretionary on trend for the past year. Industry comments included in Q1 earnings releases also emphasized a consumer trading down in search for value."

Earnings update

With 92% of the S&P 500 done reporting first quarter earnings, the index is pacing for its highest year-over-year earnings growth since the second quarter of 2022. As of Friday afternoon the S&P 500 is on pace for earnings growth of 5.4% in the first quarter, notably above the 3.2% expected entering bank earnings in early April.

FactSet senior earnings analyst John Butters points out that the index is actually doing even better when removing a massive earnings miss from just one company. Bristol-Myers Squibb (BMY) reported a first quarter loss, dragging down the S&P 500's total performance this quarter. Excluding the healthcare company, the S&P 500 is pacing for 8.3% growth, per Butters.

Stocks aren't cheering hot data

Since inflation began spiking in 2021, the stock market has gone through fits and starts in how it reacts to economic data. And that's carried on in 2024.

In a weekly note to clients, Citi US equity strategist Scott Chronert examined how stocks are reacting to hotter-than-expected economic data. Investors started the year cheering the data as they priced in a "soft landing" for the US economy, where inflation would return to the Fed's 2% target without an economic downturn. At that time, the S&P 500 moved higher with Citi's Economic Surprise Index, which gauges whether data is coming in better than consensus expectations.

But after recent hot inflation data, markets have been more skittish as investors have increasingly priced in "no landing," where inflation doesn't come down to the Fed's target but the economy keeps growing.

This had led to the market perceiving good economic news to be bad news for inflation, and therefore bad for the market's rate cut hopes. Subsequently, the correlation between the S&P 500 and economic surprise has headed toward negative territory.

"This suggests hot macro data has increasingly threatened the soft landing narrative that may be needed to push markets higher from these elevated valuation levels," Chronert wrote.

If inflation data returns to showing further cooling, the question is whether good economic growth news will be once again welcome by the market.

Weekly calendar

Monday

Economic data: New York Fed one-year inflation expectations, April (3% previously)

Earnings: BuzzFeed (BZFD), Petrobras (PBR), Stone (STNE), Tencent Music Entertainment (TME)

Tuesday

Economic data: NFIB Small Business Optimism, April (88.2 expected, 88.5 previously); Producer Price Index, month-over-month, April (+0.3% expected, +0.2% previously); PPI, year-over-year, April (+2.2% expected, 2.1% previously)

Earnings: Alibaba (BABA), Home Depot (HD), Canoo (GOEV), Rumble (RUM), Sony (SONY),

Wednesday

Economic data: Consumer Price Index, month-over-month, April (+0.4% expected, +0.4% previously); Core CPI, month-over-month, April (+0.3% expected, +0.4% previously); CPI, year-over-year, April (+3.4% expected, +3.5% previously); Core CPI, year-over-year, April (+3.6% expected, +3.8% previously); Real average hourly earnings, year-over-year, April (+0.6% previously); MBA Mortgage Applications, week ending May 10 (+2.6%); Retail sales, month-over-month, April (+0.4%% expected, +0.7% previously); Retail sales ex auto and gas, April (+0.1% expected, +1% previously); NAHB housing market index, May (51 expected, 51 previously)

Earnings: Cisco (CSCO), Dole (DOLE), Monday.com (MNDY), Super League (SLE)

Thursday

Economic data: Initial jobless claims, week ending May 11 (233,000 previously); Housing starts month-over-month, April (8.6% expected, -14.7% prior); Building permits month-over-month, April (+1.6% expected, -3.7% prior); Philadelphia Business Outlook, May (8.7 expected, 15.5 prior); Import prices, month-over-month, April (+0.2% expected, +0.4% previously); Export prices, month-over-month, April (+0.2% expected, +0.3% previously); Industrial production, month-over-month, April (+0.2% expected, +0.4% previously)

Earnings: Walmart (WMT), Applied Materials (AMAT), Baidu (BIDU), JD.com (JD), John Deere (DE), Take-Two Interactive (TTWO), Under Armour (UAA)

Friday

Economic data: Leading index, April (-0.2% expected, -0.3% previously)

Earnings: No notable earnings.

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

Click here for in-depth analysis of the latest stock market news and events moving stock prices.

Read the latest financial and business news from Yahoo Finance