Inflation puts pressure on Powell: What you should know this week

The Federal Reserve will dominate the talk for investors this week.

The final monetary policy meeting of the central bank will take place on Tuesday and Wednesday, June 14 and 15, with the Fed expected to announce a further hike in its benchmark interest rate by at least 0.50% on Wednesday afternoon.

The policy announcement on Wednesday at 2:00 p.m. ET will be followed by a press conference with Fed Chair Jerome Powell at 2:30 p.m. ET. The Fed is also due to release its latest economic forecast summary on Wednesday, which includes official projections for GDP growth, inflation and future rate hikes.

Following last Friday’s inflation data, investors are now bracing for potentially more aggressive rate hikes from the Fed, perhaps as soon as this week.

WASHINGTON, DC - MAY 04: Federal Reserve Chairman Jerome Powell speaks at a press conference following a meeting of the Federal Open Market Committee on May 04, 2022 in Washington, DC.  Powell announced that the Federal Reserve is raising interest rates by half a percentage point to fight record-high inflation.  This is Powell's first in-person press conference since the pandemic began.  (Photo by Win McNamee/Getty Images)

Federal Reserve Chairman Jerome Powell speaks at a news conference following a meeting of the Federal Open Market Committee May 4, 2022 in Washington, DC. (Photo by Win McNamee/Getty Images)

The Bureau of Labor Statistics’ May consumer price index (CPI) unexpectedly rose 8.6% in May, raising concerns on Wall Street that inflation in the US economy has become more entrenched, which Fed officials may be warning urges them to take tougher action in their efforts to curb rising costs.

“The Fed’s resolve on price stability is now being really tested,” Seema Shah, principal global investors’ chief strategist, said in a note. “Rate hikes must be relentlessly aggressive until inflation finally subsides, even if the economy is struggling.”

That “relentlessly aggressive” stance could include a 0.75% hike in interest rates on Wednesday, a move that Barclays economists said on Friday was their baseline expectation. “Historically, the US Federal Reserve has avoided surprise markets — say by going 75 basis points when they weren’t priced in,” Barclays economists led by Jonathan Millar said in a note to clients released on Friday. “But next week, we think, will probably be an exception.”

Month-on-month inflation rose 1% in May, compared to 0.3% in April. “Core” inflation, which excludes more volatile food and gas costs, rose 6% yoy in May, ahead of the 5.9% expected.

Rising inflation and the potential for more aggressive Fed action weighed on financial markets last week.

The benchmark S&P 500 tumbled 2.9% on Friday, rounding out its worst weekly performance since January and closing just above 3,900 – its lowest level in three weeks.

The drop also brought annual losses to 18%, leaving investors again waiting for an end in bear market territory or 20% below recent highs. The Dow was down 880 points, or 2.7%, and the Nasdaq Composite was down 3.5% by the end of Friday’s session.

“The CPI report is another reminder that monetary policy is no longer coddling equity markets,” said John Lynch, chief investment officer of Comerica Wealth Management, in a statement.

This downturn has also had an impact on the bond market. The US 10-year Treasury bond is having its worst year on record, down 12.8% so far. per data from Compound Advisors. The 10-year yield more than doubled in 2022, from 1.52% at the start of the year to 3.16% at Friday’s close.

“A higher-than-expected CPI number seals the deal on investor fears,” said Mike Loewengart, E*Trade’s managing director of investment strategy. “And while consumers may experience high prices on a daily basis, particularly at the pump, it’s disappointing to see that despite the Fed’s efforts, we still haven’t got inflation under control.”

In addition to the Fed’s announcement on Wednesday, investors will also be keeping a close eye on the latest retail sales report, which is due out the same morning. Commerce Department data for May is expected to show retail sales rising 0.2% last month, slowing from April’s 0.9% rise. Ex-cars and gas retail sales are expected to have slowed to 0.4% in May compared to 1% in the previous month.

“Expenditure growth excluding gas and groceries is showing signs of slowing across all income groups,” Bank of America economists said in a recent note. “The gap between three-year spending growth in oil-producing states and those with high gas prices has narrowed, suggesting the pinch of inflation is being felt more broadly.”

Also on the economic data front, traders this week will get another snapshot of the US inflation picture from the Producer Price Index (PPI), which is due to be released on Tuesday.

Economists polled by Bloomberg expect producer prices to rise 0.8% in May, up from 0.5% in the previous month; On an annual basis, we expect producer prices to have risen by 10.8% in May, slowing down from the 11% increase in April.

Corporate earnings reports are expected to be sparse in the coming week, with results from Oracle (ORCL) on Monday and Kroger (KR) and Adobe (ADBE) on Thursday serving as the highlights of the week.

economic calendar

Monday: No significant reports planned for publication.

Tuesday: NFIB Small Business OptimismMay (93.0 expected, 93.2 last month), PPI Final DemandMoM, May (0.8% expected, 0.5% mom), PPI Final DemandYoY, May (10.8% expected, 11.0% mom)

Wednesday: MBA Mortgage Applicationsweek ending June 10 (-6.5% in previous week), Empire manufactureJune (5.0 expected, -11.6 in previous month), Sales advance in retailMoM, May (0.2% expected, 0.9% mom), Retail sales excluding cars and gasolineMoM, May (0.4% expected, 1.0% mom), import price indexm/m, May (1.2% expected, 0.0% m/m), Import price index excluding oilMoM, May (0.6% expected, 0.4% mom), import price indexYoY, May (12% MoM), export price indexMoM, May (1.3% expected, 0.6% mom), export price indexyear-on-year, May (18.0% in previous month), business suppliesApril (1.2% expected, 2.0% mom), NAHB housing market indexJune (68 expected, 69 in previous month), FOMC rate decisionFloor, June 15 (1.25% expected, 0.75% before), FOMC rate decisionhigher limit, June 15 (1.50% expected, 1.00% before), Interest rate on reserve balancesJune 16 (1.40% expected, 0.90% before)

Thursday: building permitMay (1.790m expected, 1.819m in previous month, revised to 1.823m), building permitm/m, May (-1.8% expected, -3.2% m/m, revised to -3.0%), Philadelphia Fed Business Outlook IndexJune (6.0 expected, 2.6 in previous month), Initial jobless claimsWeek ending June 11 (215,000 expected, 229,000 last week)

Friday: industrial productionMoM, May (0.4% expected, 1.1% mom), capacity utilizationMay (79.3% expected, 79.0% in previous month), Manufacturing (SIC) ProductionMay (0.2% expected, 0.8% mom), Leading IndexMay (-0.4% expected -0.3% in previous month)

results calendar

Monday

Before market opening: No significant reports planned for publication.

After market close: oracle (ORCL)

Tuesday

Before market opening: Core & Main (CNM)

After market close: sprinkler (CXM)

Wednesday

Before market opening: John Wiley (WLY)

After market close: No significant reports planned for publication.

Thursday

Before market opening: Kroger (KR), Jabil (JBL)

After market close: Adobe (ADBE)

Friday

Before market opening: No significant reports planned for publication.

After market close: No significant reports planned for publication.

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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