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.