Markets Brief: The Fed's Favorite Inflation Indicator on Deck

Stocks may have avoided an official bear market Friday, but for now at least, it seems like the market will continue to be rocky.

The Morningstar US Market Index lost nearly 3% for the week, with the latest down leg driven in large part by earnings reports from the country's biggest retailers, suggesting inflation is beginning to have a negative impact on consumer spending patterns.

Markets are all about factoring in future expectations. One key variable in whether stocks are anywhere near a bottom is the degree to which inflation a) doesn’t get any worse and b) how fast it improves from here.

If inflation has peaked, and starts to ease, and the Federal Reserve isn’t seen as having to be still more aggressive with its rate hikes, that could allow stock and bond markets to find some stability.

The Fed is currently expected to raise the federal-funds rate by another half of a percentage point, to 1.25%, when the policy-setting Federal Open Market Committee next meets in mid-June. Meanwhile, bond futures pricing suggests investors expect the rate to be between about 2.5% or 2.75% by the end of the year.

There were hints of a peak in inflation in the most recent Consumer Price Index report. And investors will get a fresh update on what is often referred to as the Fed’s favorite inflation indicator, the Personal Consumption Expenditures Price Index, this coming week.

For March, the PCE index rose 6.6% on an annual basis, the largest increase since 1982. April’s data is due Friday, May 27.

Morningstar’s chief U.S. economist, Preston Caldwell, says that while the near-term picture has worsened, inflation should come under control. 

“A handful of categories are responsible for today’s high inflation, and we don’t expect pricing pressure in these categories to persist,” Caldwell says. He expects inflation to undershoot 2% in both 2023 and 2024.

Events scheduled for the coming week include:

• Monday: Zoom (ZM) reports earnings.
• Tuesday: Best Buy (BBY) and Nordstrom (JWN) report earnings.
• Wednesday: Nvidia (NVDA) reports earnings. Federal Open Market Committee’s May meeting minutes released.
• Thursday: Costco (COST), Macy’s (M), and Dell Technologies (DELL) report earnings.
• Friday: Personal Consumer Expenditures Price Index April data released.

For the trading week ending May 20:

• The Morningstar US Market Index fell 2.89%.
• Best-performing sectors were energy, up 1.16%, and healthcare rose 0.96%.
• The worst-performing sectors was consumer defensive, down 9.40% ,and consumer cyclical, which fell 6.35%.
• Yields on the U.S. 10-year Treasury fell to 2.79% from 2.93%. 
• Oil rose $2.21 to $112.70 per barrel.
• Of the 867 U.S.-listed companies covered by Morningstar, 319, or 37%, were up, and 548, or 63%, declined.

What Stocks Are Up?

The best-performing companies in the past week were Shoals Technologies (SHLS), CureVac (CVAC), TAL Education (TAL), Blackbaud (BLKB), and Paramount (PARA).

Communication services providers Paramount, Altice USA (ATUS) and AMC Networks (AMCX) rose. Paramount shares gained after Berkshire Hathaway (BRK.B) revealed a stake in the company. Altice recently disclosed plans to start hiking internet service prices by $10.

Chinese stocks rose after China’s central bank cut a key interest rate to provide some relief to the country’s economy. Shares of TAL Education (TAL), New Oriental Education Group (EDU), Yum China (YUMC), Pinduoduo (PDD), and Baidu (BIDU) closed the week higher.

What Stocks Are Down?

The worst-performing companies were Target (TGT), Bath & Body Works (BBWI), Beyond Meat (BYND), Ross Stores (ROST), and Dollar Tree (DLTR).

A host of disappointing quarterly results and inflation fears sent the shares of several retailers plunging. Target fell, as did Bath & Body Works and Ross Stores.

Shares of auto stocks were also down with Tesla (TSLA), AutoNation (AN), and Advance Auto Parts (AAP) falling this week.