Inflation will be in focus in the week ahead as stocks attempt to sustain all-time highs

Some key inflation readings in the week ahead could bolster the case for a September interest rate cut, as investors deliberate how long stocks can sustain their rally to record highs. After a rocky start to the year, a recently improving inflation picture has investors hopeful the Federal Reserve could soon start to lower rates. While the central bank indicated in its latest “dot plot” of individual projections that it will cut just one quarter percentage point in 2024, markets are currently pricing in two, with the first coming in September, according to the CME FedWatch Tool. Those hopes have only grown recently amid signs of a cooling — but not breaking — labor market. On Friday, the June nonfarm payrolls report , for example, showed the U.S. economy added more jobs than economists were anticipating. But it also showed an unexpected rise in the unemployment rate, to 4.1% from 4%, or its highest level since October 2021. Next week’s inflation data is generally expected to show that narrative remains intact. If the consumer and producer price indices, due out Thursday and Friday respectively, continue to show easing pricing pressures, that could further cement the likelihood the central bank can start to ease up on monetary policy. That would be a bullish development for investors concerned the stock rally will soon run out of steam. “Any positive moves obviously would have a very strong impact on the market,” said Mark Malek, chief investment officer at SiebertNXT. “Everyone’s looking for [a] continued trend, downward trend, in inflation. So, that’s going to be something that we’re going to be watching very, very closely.” .SPX YTD mountain S & P 500 On Friday, the S & P 500 was higher by 1.5% for the week, headed for its fourth winning week in the last five. The Dow Jones Industrial Average had gained 0.5%, while the Nasdaq Composite rose 2.6%. Stubborn inflation patches The June consumer price index is expected to show a slight improvement in the headline number. Economists polled by FactSet anticipate CPI to have risen 3.1% last month on a year-over-year basis, down from the 3.3% gain it registered in the prior month. But investors will pay special attention for any improvement in core services, specifically shelter costs, where inflation has remained particularly sticky — even as other more-frequent housing data outside CPI has indicated softness. In May, for example, shelter inflation rose 0.4% on the month and 5.4% on the year, while other key items declined. “I think there’s been some surprise with how slowly the moderation in a lot of the real-time housing indicators has kind of filtered into the CPI measures with shelter inflation,” said Ross Mayfield, investment strategy analyst at Baird. “If there’s a catch down where the shelter CPI, owners-equivalent rent, kind of catches down to what we’re seeing in Zillow or Apartment List or any of the other real-time rent indicators, there could be some downward or unexpected downward pressure to CPI.” “I don’t know if it’ll be this month, but I think there will be a month where that occurs,” Mayfield added. “If you [get] CPI under 3%, I think it’s going to be a real kind of risk-on moment for the markets.” Investors will also parse through Friday’s producer price index, which bolstered equities last month after the most recent reading showed unexpected signs of disinflation. The PPI is a measure of wholesale prices received by domestic producers, and can be taken as a leading indicator of where inflation is headed. The June PPI is expected to show a slight increase. Economists polled by FactSet expect it to have risen 2.3% in June, up from 2.2% in the previous reading. Elsewhere, the University of Michigan sentiment indicator due out next Friday will give investors insight into how consumers are feeling about the economy, including their expectations around inflation. Stick to winners or diversify Next week’s busy calendar will come as the S & P 500 continued to post all-time highs, albeit during a holiday-shortened trading week typically defined by lower trading volume. The broader index has now registered a 16% advance in 2024. Investors are concerned that means a selloff is on the horizon, but many differ on how to position their portfolios from here. Some expect this is the time to stick to the market leaders, the mega-cap tech stocks that boast both rosy growth expectations thanks to optimism around artificial intelligence, as well as fortress balance sheets that make them defensive plays in an uncertain economic outlook. However, others say it’s time for investors to start diversifying their bets in the event of a pullback, especially for those with a long-term time horizon concerned about current valuations. “Markets have gotten concentrated, but also a lot of portfolios have gotten concentrated. So, it’s important to be diversified,” David Kelly, chief global strategist at JPMorgan Asset Management, told CNBC’s “Squawk on the Street” on Friday. “Not because we see some imminent threat, but because eventually something will go wrong.” Also next week, the second-quarter earnings season will kick off with some major bank results. Citigroup, Wells Fargo and JPMorgan Chase are each set to report. PepsiCo and Delta Air Lines will also give investors insight into the consumer on Thursday. Week ahead calendar All times ET. Monday July 8 3pm Consumer Credit (May) Tuesday July 9 6 a.m. NFIB Small Business Index (June) Wednesday July 10 10 a.m. Wholesale Inventories final (May) Thursday July 11 8:30 a.m. Consumer Price Index (June) 8:30 a.m. Initial Claims (07/06) 2 p.m. Treasury Budget (June) Earnings: Delta Air Lines , PepsiCo , Conagra Friday July 12 8:30 a.m. Producer Price Index (June) 10 a.m. Michigan Sentiment preliminary (July) Earnings: Citigroup , Wells Fargo , JPMorgan Chase , Fastenal , Bank of New York Mellon