Inflation data puts stock market rally to the test: What to know this week

The Federal Reserve’s preferred inflation measure will be the main obstacle for stock market bulls looking to extend the recent rally in the week ahead. Thursday morning will bring the release of the Personal Consumption Expenditures (PCE) index for October, and economists expect “core” PCE inflation — the Fed’s preferred gauge — rose 3.5% annually last month. The economic calendar will also feature updates on manufacturing activity, consumer confidence, and home prices. On the corporate side, quarterly reports are expected from Salesforce (CRM), Snowflake (SNOW), Okta (OKTA), Dollar Tree (DLTR), Foot Locker (FL), Kroger (KR), and Ulta Beauty (ULTA). Stocks exited a holiday-shortened trading week higher, with the leadership drama at OpenAI and Nivida’s (NVDA) latest quarterly report garnering the bulk of investor attention. All three major averages closed the three-and-a-half days of trading up about 1%.

Inflation in focus

Broadly, the week ahead will provide a test for the current market as stocks ended Friday pacing towards their best monthly gain in more than a year. Thursday’s inflation reading will offer a final chance for economic data to derail the current narrative bolstering stocks that the US economy may be headed for a “soft landing,” in which inflation retreats to the central bank’s 2% target without a severe economic downturn. Recent economic data has fallen in line with that path, sending beaten up areas of the stock market like small cap stocks and meme stocks into rally mode. This data has pushed around expectations for the Fed, too, with markets now pricing in just a 12% chance the Fed raises rates again, according to data from the CME Group. Economists expect annual inflation according to the Fed’s preferred inflation gauge — “core” PCE — clocked in at 3.5% in October. Over the prior month, economists expect “core” PCE rose 0.2%. In a note to clients this month, JPMorgan’s chief US economist Michael Feroli noted this 0.2% monthly rise “would leave the 3- and 6-month annualized gains in that measure at 2.5% and 2.6%,” much closer to the Fed’s 2% target than October’s 12-month gain is set to show. “Those increases are close enough to the Fed’s 2% inflation goal that most on the FOMC are likely content to stand pat on policy and let cooling labor market activity finish the job of getting inflation back to target,” Feroli added. “We continue to think the next move from the Fed is toward easier policy, but not until 3Q24.” Earlier this month, stocks surged and bonds rallied — which sent yields lower — after October’s Consumer Price Index showed inflation continued to slow last month.

Software, soft sales

On the corporate side, a smattering of quarterly results will provide investors a further look at the health of the consumer, a look at the state of software demand, and whether AI is moving the needle for these business’ customers. Foot Locker, Ulta Beauty, and Dollar Tree will be closely monitored for any forecasts regarding the holiday season and commentary on whether elevated interest rates and a softening labor market are pushing consumers to trade down. Salesforce’s guidance for the current quarter will be scrutinized by the Street, with analysts at Goldman Sachs noting this period captures when customers decide on renewals and add-ons for next year’s service. Wall Street analysts expect the company’s results to reveal how companies paying for cloud services or tools like Slack are responding to price increases. Updates on demand for Salesforce’s AI products will also be in focus. “Customers continue to optimize spend, reduce shelf ware, and prioritize software that delivers near-term value creation, resulting in a challenging demand environment for [Salesforce],” Citi analyst Tyler Radke wrote in a note to clients on Wednesday. Results from Workday, Intuit, Snowflake, and Okta should hit on similar themes in the coming week.