Key inflation report may derail interest-rate cuts

Financial markets were whipsawed all last week as investors worried if what seems like a robust stock market might be looking vulnerable.

To geopolitical issues.To rising interest rates and jumping oil markets. To a hot economy and new inflation pressures.

The result was a week of big gains and losses, especially on Thursday when geopolitical concerns and musings on how many interest-rate cuts the Federal Reserve will make this year, freaked markets.

Geopolitics is still a big wild card

Stocks enjoyed a big rebound rally on Friday after a stronger-than-expected jobs report suggested the domestic economy remains strong.

But inflation and geopolitical worries were always at work.

Crude oil climbed to $86.91 a barrel, 4.5% gain for the week. Crude has jumped 21% this year. The national retail price of gasoline averaged $3.59 on Saturday. It's up 15.4% for the year.

Gold rose to a record $2,345.40 an ounce and is up 13.2% for the year and has jumped 27% since bottoming in October.

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Sure, these big commodity-price jumps were about inflation.

But they were also as much the product of worries that the conflict in the Middle East could expand and the state of the Ukraine-Russia War.

Officials in Israel and the United States were watching whether Iran would launch a retaliatory attack on one or both after a bombing last week in Syria killed Iranian military officers.

The worries will influence markets again this week.

In addition, the initial release of first-quarter corporate earnings reports starts this week.

Traders watch market action.Michael M. Santiago/Getty Images

The two big reports to watch

This week brings two very big inflation reports, the Consumer Price Index for March on Wednesday and the Producer Price Index on Thursday.

The consensus CPI estimate is for a 3.4% year-over-year gain, up from 3.2%. The core increase is expected at 3.7% year over year, down from 3.8%.

The CPI data suggests getting inflation to the Fed's official target of 2% a year will be tough to achieve this year, but benign numbers for March and beyond could make the first rate cut or two happen, possibly by June.

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Estimates for Producer Price Index are closer to what the Fed wants to see.

That said, markets may be pressured if the two data reports show inflation stronger than expected. That will feed the thinking making its way through Wall Street the Federal Reserve won't be cutting its key federal funds rate any time soon.

The rate has been at 5.25% to 5.5% since July 2023, and the year opened with many Wall Street traders sensing six rate cuts in 2024.

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Three cuts is now the conventional wisdom, ranging from 3.75% to 4%. The fed funds rate is the price the central bank wants banks to pay to borrow money from other banks to meet reserve requirements. It is the rate from which all U.S. rates are derived.

But all the people who set the rates don't appear wedded to the idea, although Chairman Jerome Powell does seem committed.

Raphael Bostic, president of the Federal Reserve Bank of Atlanta, thinks one rate cut is enough and may expand on the point when he gives a speech on Thursday.

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Neel Kashkari, president of the Minneapolis Federal Reserve Bank, suggested in an appearance this past week hot inflation numbers might force the Fed to kill the idea for the year. (He's scheduled for another speech on Monday.)

Not cutting rates at all (after months of Powell insisting rate cuts were coming) would dismay many people, investors and businesses. These would probably include:

Home buyers, interested in the lowest mortgage rates possible. Home sellers, wanting low rates to attract potential buyers. Small home builders interested in building more homes with lower financial costs.Auto dealers, who need cheap credit to sell and used vehicles and cheap to finance the inventories in their showrooms.Farmers who borrow cash at the beginning of the growing season, paying it back after selling their crops.

But at the same, other parts of the economy may not need rates to come down, at least not yet.

A bit of a downer week for stocks

Stocks were generally lower for the week; it didn't matter what index one looked at.

The Dow was off 2.3%, with Boeing (BA) , Nike (NKE) and UnitedHealth Group (UNH) and among the week's losers.

The Nasdaq and Nasdaq-100 were off less than 1%. The small-cap Russell 2000 index fell 2.9%.

Hot stocks in the first quarter sagged during the week.

Energy stocks in particular moved higher; the S&P 500's energy sector was the top performer for the week, up 3.9%. Healthcare was the weak link, down 3.1%.

For every Exxon Mobil XOM, up 4.1% on the week, there was electric-vehicle maker Tesla (TSLA) , down 6.2%. ConocoPhillips (COP) jumped 4.9%; Merck (MRK) dropped 3%.

Nvidia (NVDA) was off 2.6% for the week. (While Nvidia's shares are still up 77% this year, they have fallen 9.6% from their March 8 intraday peak of $974.)

Get ready for earnings season

Perhaps the unease that hit markets this past week after a terrific first quarter for stocks isn't misplaced.

The first reports on first-quarter results starts this week, and financial data company FactSet is already seeing some worries.

Both the number and percentage of S&P 500 companies issuing negative EPS guidance for Q1 2024 are above their recent averages, John Butters, FactSet's senior earnings analyst, wrote on Friday.

So far, 112 companies have issued quarterly guidance ahead of releasing their results. Of these, 79 have issued negative EPS guidance and 33 have issued positive EPS guidance.

The negative warnings number is above FactSet's five-year of 62 and and 10-year average of 58, Butters noted. The number ties with what FactSet saw in the second quarter of 2019 and first quarter of 2016. (FactSet has been tracking this data since 2006.)

Seven sectors are leading the parade: technology, industrial, health care, consumer staples, materials, real estate and financial.

Of this week's earnings, we start with Friday because some of the biggest financial institutions all report results that morning.

These include JP Morgan Chase (JPM) , Wells Fargo (WFC) , insurance company Progressive (PGR) , money manager BlackRock (BLK) , Citigroup (C) and money manager State Street (STT)

Others reporting this week include:

Tuesday with Tilray (TLRY) , the marijuana and pharmaceutical company, and WD-40 Co. (WDFC) .Wednesday: Delta Air Lines (DAL) , expected to show strong results from increased travel demand.Thursday: Beverage maker Constellation Brands (STZ.B) and industrial supplies company Fastenal (FAST) .

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