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The optimism about inflation and the U.S. economy is quickly waning on Wall Street, and the early 2023 rally for stocks is fading. The market was under pressure again on Friday after a hotter-than-expected reading for personal consumption expenditures, sending rates higher and stocks lower. The S & P 500 is now up just 3% for the year. It appears investors will need to white-knuckle through several more months of rate hikes and inflation reports before seeing prices drop further, especially on the services side where the Federal Reserve is focused. “In essence you have this underlying demand for services that’s still above ‘normal’ demand levels, and so therefore those services categories are going to feel like they’re under that inflationary pressure for a little bit longer,” said Jeffrey Roach, chief economist for LPL Financial. He added that, while he still thinks inflation will fall below 4% by the end of the year, upcoming data reports will be “choppy.” While the reversal higher for rates hasn’t yet caused the massive selloffs for stocks seen early last year, the idea of a “no-landing” scenario and a true rally certainly seems far off now. Another rally for the market will be hard to come by until the inflation picture clears up. “The recent repricing of interest rate expectations has put some renewed focus on valuations. … The market is going to wait to get a little more clarity on what the peak fed funds rate is going to be, but we do not have to repeat last year’s experience,” said Angelo Kourkafas, investment strategist at Edward Jones. “At the same time, if we think that where interest rates settle is going to be at a higher point, then there is less hope for valuations to expand,” he added. Economic updates Next week brings a new round of economic indicators to see how the sticky inflation is affecting consumers and business. Durable goods orders on Monday, consumer confidence on Tuesday and the ISM manufacturing survey on Wednesday are some of the notable reports in the coming days. Unlike the consumer sector, there are some parts of the economy like housing that have been slowed significantly by the Fed’s rate hikes. They could be under renewed pressure with rates moving higher again. “People need to be prepared that 10-year yields are moving higher. I don’t know if we are going to go back to 4.5% or 4.4%, but this whole notion of a soft landing I don’t believe is anywhere accurate given … you’re not getting rebounds in any of the early cyclical economic indicators, which just tells us this was a good bear market rally,” said Andrew Smith, chief investment officer at Delos Capital Advisors. Other looks at the economy will come through key earnings reports. Several major retailers report next week, including Target and Costco . Investors will be looking for signs about customers tightening their bests, as well as commentary around wages and supply chains. Enterprise software giant Salesforce is also scheduled to release its latest results on Wednesday. The labor market is the one area that is holding up well for bullish investors, and its continued strength keeps hope for avoiding a recession alive. The next monthly jobs report does not come out until March 10, which could help stocks hold in a trading range in the meantime. “We will not see any material downside until we see cracks in the labor market,” Smith said, but he cautioned that the strong labor market can create a “negative feedback loop” with sticky inflation and an aggressive Fed. Monday: Earnings: Occidental Petroleum, Workday, OneOK, Heico, Li Auto, Zoom Video, BioMarin Pharmaceutical, AES Corp., Viatris, Essential Utilities, Darling Ingredients, Universal Health Services, Pinnacle West Capital 8:30 a.m. Durable orders 10:00 a.m. Pending home sales 10:30 a.m. Dallas Fed index 10:30 a.m. Speech by Fed Governor Philip Jefferson Tuesday: Earnings: Target, Bank of Montreal, Scotiabank, Monster Beverage, Sempra, AutoZone, Agilent Technologies, Ross Stores, HP Inc., Verisk Analytics, HP Inc, Coupang, Rivian Automotive, First Solar, J.M. Smucker, Norwegian Cruise Line Holdings, AMC Entertainment 8:30 a.m. Wholesale inventories 9:00 a.m. FHFA Home Price index 9:00 a.m. S & P/Case-Shiller home prices 9:45 a.m. Chicago PMI 10:00 a.m. Consumer confidence 10:00 a.m. Richmond Fed index Wednesday: Earnings: Salesforce, Royal Bank of Canada, Lowe’s, Snowflake, Dollar Tree, Veeva Systems, Horizon Therapeutics, Nio, Splunk, Liberty Media, Okta 9:45 a.m. Markit PMI Manufacturing 10:00 a.m. Construction spending 10:00 a.m. ISM Manufacturing Thursday: Earnings: Broadcom, Costco, Toronto Dominion, Anheuser-Busch, Marvell Technology, Kroger, Dell Technologies, Hormel Foods, Hewlett Packard Enterprises, Zscaler, Best Buy, Burlington Stores, Macy’s 8:30 a.m. Jobless claims 8:30 a.m. Unit labor costs and productivity 4:00 p.m. Speech by Fed Governor Christopher Waller Friday: 9:45 a.m. Markit Services PMI 10:00 a.m. ISM Services PMI 3:00 p.m. Discussion from Fed Governor Michelle Bowman
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