An inflation print and bank earnings: What to know this week

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Corporate earnings season is starting back up on Wall Street.

Reports from some of the nation’s largest financial institutions and a crucial reading on inflation will greet investors in the week ahead.

Thursday morning will feature the Consumer Price Index (CPI) for December, with December’s Producer Price Index (PPI) out Friday.

The week will close with slew of bank earnings from JPMorgan (JPM), Wells Fargo (WFC), Bank of America (BAC), BlackRock (BLK), and Citi (C) kicking off fourth quarter earnings season.

Stocks enter the fourth quarter reporting period in cooldown mode. After nine-straight weeks of gains, the S&P 500 produced a negative week to start 2024. Over the last five trading sessions, the tech-heavy Nasdaq (^IXIC) was down nearly 4%. The benchmark S&P 500 (^GSPC) fell almost 2% while the Dow Jones Industrial Average (^DJI) slipped nearly 1%.

A surprise December jobs report showed the US labor market ended 2023 on largely solid footing. The labor market added 216,000 jobs in December, about 40,000 more than the month prior and ahead of Wall Street’s estimates for the latest report. The unemployment rate held steady at 3.7%, a historically low level.

Average hourly earnings, a closely watched indicator for inflation and a gauge of how much leverage workers have in the labor market, increased 0.4% on a monthly basis and 4.1% over last year; economists had expected wages to rise 0.3% over last month and 3.9% over last year.

“The strength in the wage data argues for the Fed to remain on hold for a while longer,” Jefferies US economist Thomas Simons wrote in a note to clients on Friday. “[Average hourly earnings are] running considerably faster than inflation over the past few months. The Fed is pleased with the progress they have made in getting inflation back down to 2%, but continued strength in [average hourly earnings] will make that ‘last mile’ problem even more difficult to solve.”

As Simons nodded to, the debate on when the Federal Reserve will cut interest rates continues to brew. Goldman Sachs still sees the first cut coming in March.

“We continue to expect three consecutive 25bp cuts in the Fed funds rate in March, May, and June on the back of lower core inflation,” Goldman’s economics team led by Jan Hatzius wrote on Friday.

For now, the market pricing is on Goldman’s side, though odds are shifting. As of Friday afternoon, markets were placing a roughly 66% chance of a rate rate cut in March. A week ago, investors had placed a nearly 88% chance on a cut, per the CME FedWatch Tool.

Much of the debate around when the Fed will cut centers around how certain the central bank can be that inflation is indeed headed downward toward the Fed’s 2% goal.

More information on that will come in the week ahead with the December CPI print.

Wall Street economists expect headline inflation rose 3.2% annually in December, a slight uptick from the 3.1% seen in November. Prices are set to rise 0.2% on a month-over-month basis, also a slight increase from the 0.1% in November.

On a “core” basis, which strips out food and energy prices, CPI is forecast to rise 3.8% over last year in December, a slowdown from the 4.0% increase seen in November. Monthly core price increases are expected to clock in at 0.3%.

“On balance, we look for next week’s CPI report to show that inflation continues to slow on trend in a way that positions the FOMC to start cutting rates in June,” Wells Fargo’s economics team wrote in a research note on Friday. “Energy prices were more stable last month and are unlikely to repeat the major declines that occurred in October and November. We expect the disinflation in core goods to continue amid demand normalization, healthier supply chains and the fall in commodity prices from their peak.”

On the corporate side, fourth quarter earnings season will kick off with heavy hitters. Delta Air Lines (DAL), JPMorgan, Citi, Wells Fargo, Bank of America, and BlackRock are all set to report on Friday morning.

Investors will look for updates on consumer spending as well as how financials are holding up amid the higher rate environment. The prospect of Fed interest rate cuts in 2024 could be a boost to bank stocks, according to Wells Fargo analyst Mike Mayo, who covers financials.

“You saw with the Fed’s pivot in December, bank stocks started to outperform,” Mayo told Yahoo Finance Live. “But when you actually see [the Fed rate cuts] happening, I think banks will perform even more. And I think the risk of the downside will be mitigated.”

The financial sector will provide the first look at how corporates performed in the fourth quarter. Broadly, Wall Street has been increasingly pessimistic on fourth quarter earnings. Since September 30, estimates for S&P 500 earnings have fallen 6.8%, per FactSet. That marks the largest decline since the third quarter of 2022 and sits well above the 20-year average of a 3.8% decline.

Deutsche Bank chief US equity strategist Binky Chadha sees a more robust quarter for earnings. But in the near-term, even that might not be a boost to the market, per Chadha, who notes stocks massive end of year rally puts equities in precarious position.

“The size of the equity rally during earnings seasons has historically been tied largely to market performance and equity positioning going in,” Chadha explained in a note to clients. “Despite the robust growth and strong beats we expect this season, the market rally is likely to be tempered by the solid run up in the S&P 500 since the end of the previous earnings season and elevated (but not extreme) equity positioning.”

Marquee at the main entrance to JPMorgan Chase headquarters building in Manhattan. (Photo by Erik McGregor/LightRocket via Getty Images) (Erik McGregor via Getty Images)

Weekly calendar

Monday

Economic data: No notable economic releases

Earnings: Jefferies (JEF)

Tuesday

Economic data: NFIB Small Business Optimism, December (90.6 expected, 90.6 prior)

Earnings: WD-40 (WDFC), Tilray (TLRY)

Wednesday

Economic data: Wholesale inventories month-over-month, November (-0.2% expected, -0.2% previously)

Earnings: KB Home (KBH)

Thursday

Economic data: Initial jobless claims, week ended Jan. 6 (211,000 expected, 202,000 previously); Consumer Price Index, month-over-month, December (+0.2% expected, +0.1% previously); CPI excluding food and energy, month-over-month, December (+0.3% expected, +0.3% previously); Consumer Price Index, year-over-year, December (+3.2% expected, +3.1% previously); CPI excluding food and energy, year-over-year, December (+3.8% expected, +4% previously); Real Average Hourly Earnings, year-over-year, December (+0.8% previously); Real Average Weekly Earnings, year-over-year, December (+0.5% previously)

Earnings: No notable earnings

Friday

Economic data: Producer Price Index, month-over-month, December (+0.2% expected, 0% previously); PPI, year-over-year, December (+1.3% expected; +0.9% previously); Core PPI, month-over-month, December (+0.2% expected, 0% previously); Core PPI, year-over-year, December (+2% expected; +2% previously)

Earnings: Delta Air Lines (DAL) JPMorgan (JPM), Citigroup (C), BlackRock (BLK), Bank of America (BAC), BNY Mellon (BK), Wells Fargo (WFC), UnitedHealth (UNH)

Josh Schafer is a reporter for Yahoo Finance.

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