Jam-Packed Week Ahead Features Fed Meeting, Critical Inflation Data, Retail Sales

(Monday market open) After a rare quiet week of subdued and range-bound trading on Wall Street, the flood of data and central bank meetings begins tomorrow and has markets on edge. Investors will know more by Friday about the Federal Reserve’s outlook for the economy, inflation, and interest rates.

The excitement starts with the May Consumer Price Index (CPI) report an hour before Tuesday’s opening bell. It’s due out just as the Federal Open Market Committee (FOMC) gathers for its two-day meeting. The Fed will release its decision on interest rates after lunch Wednesday, and market participants bake in high chances that rates will remain unchanged for the first time since early 2022.

The FOMC meeting also includes the Fed’s first projections for future rates and the economy since March. Eyes will be on the so-called dot-plot, which show’s Fed officials’ estimated rates for the end of coming years. The market had long predicted rate cuts this year, but those hopes vanished last month. Even so, stocks entered a new bull market late last week. Perhaps that’s a sign that investors are somewhat comfortable with current high borrowing costs and the chance of rates staying higher for longer.

Morning rush

• The 10-year Treasury note yield (TNX) was up slightly at 3.74%.
• The U.S. Dollar Index ($DXY) edged lower to 103.48.
• The Cboe Volatility Index® (VIX) futures jumped to 14.59 despite stock futures rising, which is atypical.
• WTI Crude Oil (/CL) slipped to $68.46 per barrel after Goldman Sachs (GS) cut its oil price forecast.

Taking bids: The Treasury Department has several auctions scheduled today for notes ranging from six months to 10 years, and it will be important to track demand. Some suggest the Treasury may flood the market with debt to refill the coffers after they sank dangerously low during the debt ceiling standoff. More supply could weigh on Treasury note values if demand doesn’t keep pace, causing yields to rise. There’s no guarantee of that, and it’s also possible the Treasury could spread out its auctions carefully to avoid supply issues.

Eye on the Fed

Chances of a pause to interest rate hikes at this week’s FOMC meeting stand at 75% this morning, according to the CME FedWatch tool, which also prices in a 66% chance that rates will rise by July.

Though inflation remains well above the Fed’s 2% goal, Fed policymakers recently telegraphed that they might want an extra month to watch the economy react to recent hikes before deciding on next steps. Still, investors should prepare for potentially hawkish comments from Fed Chairman Jerome Powell after the meeting; the Fed won’t want to signal that a pause necessarily means the end of the cycle. Futures trading indicates high likelihood of another 25-basis-point rate hike in July.

The Fed isn’t the only central bank meeting this week. The European Central Bank (ECB) is expected to issue a rate decision Thursday followed by the Bank of Japan (BoJ) on Friday. Analysts expect the ECB to raise rates by 25 basis points and the BoJ to keep its stance unchanged.

What to Watch

Data deluge: Critical data points are due out this week starting tomorrow and wrapping up Thursday, including the CPI, the May Producer Price Index (PPI) and May Retail Sales. Both CPI and PPI hit the tape before the FOMC meeting ends, so it’s possible they could influence the Fed’s decision.

Consumer prices: The market likely will be on tenterhooks first thing tomorrow as participants await the May CPI release at 8:30 a.m. ET. As a reminder, CPI and core CPI (which strips out food and energy) rose 0.4% in April, above the level the Fed likely wants to see to push annual inflation toward the central bank’s 2% goal. Rising shelter costs and used car and truck prices helped swell April price growth. Still, the annual inflation rate of 4.9% in April was the lowest in two years.

Consensus among analysts for Tuesday’s May CPI, according to Trading Economics:

• CPI: +0.2% month-over-month
• Core CPI: +0.4% month-over-month
• Annual CPI: +4.1%., down from 4.9% in April
• Annual core CPI: +5.3%, down from 5.5% in April

If the actual data look similar to projections, it would indicate progress, but likely not enough to prevent the Fed from considering additional rate increases. Keep an eye on the CME’s FedWatch tool in the minutes and hours after the CPI release to see how market participants expect it to affect the Fed’s decision.

Producer prices: Tomorrow’s CPI report is followed by PPI on Wednesday morning, again before the open. Recently, PPI has fallen to milder levels than CPI, a positive sign if it means companies can pass along their savings to customers by not raising prices so quickly. In April, both PPI and core PPI rose 0.2%.

Consensus among analysts for Wednesday’s May PPI, according to Trading Economics:

• PPI: -0.1% month-over-month
• Core PPI: +0.2% month-over-month
• Annual PPI: +1.5%, down from 2.3% in April
• Annual core PPI: +2.9%, down from 3.2% in April

Beijing correspondence: There’s also data on tap from China this week. Watch Wednesday night (U.S. time) for May industrial production, retail sales, and unemployment figures. With the Chinese recovery under a microscope lately, this data could move markets, especially if it indicates additional signs of flagging in the reopening.

Crude awakening: The crude oil market failed to recover last week despite Saudi Arabia’s unilateral decision to tighten production. Soft data from Europe and China and a bump in U.S. crude output hurt the Saudi plans to push up prices, at least for now. U.S. crude production the first week of June reached 12.4 million barrels a day—the highest since early April 2020, the government said. U.S. crude inventories are the highest for this date in three years. Additionally, U.S. gasoline demand hasn’t recovered to prepandemic levels, down nearly 7% in early June from the same week in 2019.

Stocks in the Spotlight

Cloud corner: After the close we’ll get earnings from Oracle (ORCL), which delivered mixed results its last time out. The company’s cloud services and cloud infrastructure segments posted solid its prior quarter and will likely be in the spotlight again today.

Oracle’s business touches many applications globally, making its performance a decent proxy for global technology demand. Artificial intelligence (AI) is the theme of the year for tech, and Oracle discussed it on its last call. Expect to hear more on this today, as Oracle calls AI an integral part of its business. Also consider listening for any discussion about the impact of foreign currencies. Oracle cited that as a challenge earlier this year, but the dollar has weakened since then.

Talking technicals: Last summer’s high of 4,325 for the S&P 500® Index (SPX) stands as possible technical resistance, analysts say, and it also marks a point on the charts that corresponds with a key Fibonacci retracement level, if you follow that technical indicator. If the SPX pushes above that level, it’s possible more buyers could jump in.

Bull is back: The transition last week back into a bull market partly reflected a notable lack of negative catalysts. Learn more about the data driving the markets in the latest Schwab Weekly Trader’s Outlook.

Thinking cap

Ideas to mull as you trade or invest

Projection time: This week’s FOMC meeting isn’t just about the rate decision. It also will include updated Fed projections on the estimated future path of rates as well as economic growth, inflation, and employment. One element under scrutiny is the FOMC’s dot-plot projection for the “terminal,” or peak, target rate range of 2023. Back in March, the last time the FOMC released a dot-plot, 10 of the 18 FOMC members saw the range peaking between 5% and 5.25%. Last month’s 25-basis-point hike took rates to that range, meaning we’re now at the Fed’s projected terminal rate.

Connecting the dots: The median end-of-year dot-plot estimate is likely to rise 25 basis points from current levels, according to Kathy Jones, Schwab’s chief fixed income strategist. The futures market prices in a nearly 70% probability of rates rising to 5.25% to 5.5% in July, which would match the new terminal rate if the dot-plot does increase 25 basis points. The March dot-plot showed seven FOMC members forecasting rates to rise above 5.25% this year, with the most hawkish at between 5.75% and 6%. The question is how many will now predict 5.5% or higher, and will the March hawks stay put at levels below 6% or start penciling 6% or higher? Watch the dispersion of rate estimates, which could be wide. Also remember to start looking at where median dot-plot estimates are for 2024. In March, the median end-of-year 2024 projection was a range of 4% to 4.25%, but one FOMC estimate was as low as 3.25%.

Puzzle pieces: A new bull market began last week as the S&P 500® Index (SPX) climbed 20% from its October closing low, but some parts of the market that often sizzle when bull markets roar remain chilly. For instance, the Dow Jones Transportation Average ($DJT) remains down 10% from its 2023 high, and the Nasdaq Biotech Index (NBI) is off 6% from its peak 2023 level. There’s no “normal” in the markets, but typically one expects a cyclical sector like transports—which tends to do well when the economy improves—and a speculative one like biotech, which often does better when investors feel positive, to be among the leaders when Wall Street surges. That isn’t the case now, and it’s a bit puzzling.

Calendar

June 13: May Consumer Price Index (CPI), beginning of FOMC’s two-day meeting.

June 14: FOMC rate decision, May Producer Price Index (PPI), and expected earnings from Lennar (LEN).

June 15: May Retail Sales, May Industrial Production, June Empire State Manufacturing, and expected earnings from Kroger (KR).

June 16: Preliminary June University of Michigan Consumer Sentiment.

June 19: Markets closed for Juneteenth, a U.S. federal holiday.

 

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