Volatile week ahead: CPI, Fed “minutes”, earnings season

Investors have a lot on their plate this week, including the first look at March inflation data, the "minutes" from the US Federal Reserve's most recent policy meeting, and the start of Q1 earnings season.

CPI

The Consumer Price Index (CPI) due on Wednesday is expected to show inflation slowed month-over-month while the Producer Price Index (PPI) on Thursday is seen holding unchanged. It's worth noting that the so-called CPI "core" rate, which strips out food and energy prices, is projected to increase again to a rate of +5.6%, which would be above the headline rate of +5.2% that economists are forecasting.

Most equate this to stubbornly high "shelter" costs, while energy prices and to a lesser degree, food prices, have both come down since a year ago. This could be problematic for the Fed's inflation fight as the central bank prefers "core" rates, viewing them as a better gauge of the true price pressures that consumers face. However, there are still numerous signs that inflationary forces are receding. The biggest and perhaps most important to the Fed is mounting evidence that the job market is cooling off. Notably, the March Employment Situation on Friday showed job gains came in lower-than-expected at +236,000, slightly below expectations and the slowest pace since 2020. Average weekly hours as well as wage growth also declined, indicating a reduction in labor demand by businesses. This backs up other data that points to the US job market loosening up, although conditions vary by sector. The job market for the services sector still remains extremely tight with wages rising at an annual rate of +6.1% in March, versus overall wage growth of +4.2%.

Still, stock bulls believe signs of "disinflation" are enough to justify a pause in Fed rate hikes at the upcoming May 2-3 meeting. Many bulls are hopeful that getting the threat of higher rates off the board will clear the way for higher stock prices ahead. Bears mostly believe that recession is inevitable and argue an end to Fed rate hikes will prove little consolation to investors in the long run if an economic downturn threatens earnings.

Q1 earnings

Bears also warn that Q1 earnings season may be worse-than-anticipated, particularly for big tech companies that have led recent gains. Bulls further expect companies will be delivering warnings about the quarters ahead during Q1 announcements over the next few weeks, which could see more money rotating out of stocks and into safer havens like money markets and bonds. JPMorgan Chase, Citigroup, and Wells Fargo "unofficially" kick of Q1 earnings season on Friday.

Most big tech results start rolling out the week of April 24. It's also worth noting that China is set to release a series of key economic data this week including readings on inflation, trade, and renminbi lending, all of which have the potential to inject more volatility into markets.

The renminbi lending report will be particularly scrutinized as those flows are viewed as a forward looking view of China's growth potential as its reopening from pandemic restrictions continues.