Week Ahead Full Of Inflation Pitfalls And Fed Fear

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Includes: AIR, ANCX, ATLO, BKSC, BOND, C, CBSH, CDMO, CMTV, CNBKA, CPI, CUDA, DAL, DIA, EDUC, EMMS, FAST, GLD, HCSG, HELE, HIFS, IWM, JCTCF, JPM, MSM, MYCC, OMC, OZK, PACW, PEP, PNC, PVBC, PYX, QQQ, SKIS, SLP, SPY, UBFO, USO, UUP, VALU, VTI, VXX, WDFC, WFC, YUM
by: Markos Kaminis

Summary

Inflation measures matter most this week, with a five-day period packed full of them.

Heating inflation means a more aggressive Fed tightening pace, and is bad for stocks.

However, strong economic data justifies Fed policy and serves stocks, as we saw last week.

Fed Chair Yellen gives the historic semiannual testimony before Congress this week, and constituent sensitive Congressmen tend to ask tough questions.

This report focuses on the factors I see as most important to the market this week.

The week ahead is absolutely jam-packed full of inflation measures. A few of those are coming from an area where I'm expecting to see inflation catch fire shortly, the labor market. So, while last week received a burst of energy from strong economic data, this week's inflation measures present possible pitfalls. The key word here, though, is "possible," as the economy should heat up here, and that serves stocks. We will also hear from the Fed Chair in a historic testimony before Congress, and we will get critical retail sales data, as well as earnings from some of the big banks.

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Every single day of this week's trading schedule includes a bit of information relative to the pace of inflation. Starting on Monday, with the Labor Market Conditions Index release, investors and the Federal Reserve will have something to consider. Monday's data, arriving at 10:00 AM EDT, provides a comprehensive measure of the labor market, and is perhaps an even better measure of economic health than the monthly Employment Situation Report. I'll be taking a close look at it Monday and I'm sure the Fed will be too. As labor market conditions improve, so does the likelihood of compensation inflation.

That said, this specific report serves investors' perspective of economic health more directly and is more likely to serve stocks than to hurt them on any good news. This data will be your most important market driver Monday, and is likely to serve the continuation of equities' climb. Last month, the index climbed to a better than expected mark of 3.5. This month, economists expect a reading of 1.8.

The day's schedule offers insight from San Francisco Fed Bank President John Williams. He'll be speaking in Sidney, Australia, but you can be sure that what he has to say about fostering sustainable growth in the U.S. will find its way back to the newswire here at home.

We will be getting into the heat of earnings season soon, but we are not quite there yet. Still, on Monday, look for data from Alliance One International (NYSE: AOI), Bank of the Ozarks (Nasdaq: OZRK), Barracude Networks (NYSE: CUDA), Century Bancorp (Nasdaq: CNBKA), Healthcare Services Group (Nasdaq: HCSG), Helen of Troy (Nasdaq: HELE) and WD-40 (Nasdaq: WDFC).

Tuesday's market driver could come from a Fed speaker or the NFIB small business index, but it should come from the JOLTS Report. The first of the day's data will arrive in the form of the National Federation of Independent Business (NFIB) Small Business Optimism Index. It's a measure the President and his panel of advisors pay attention to, so he might tweet on the data. Economists expect the index to hold at 104.5 for June, which is a pretty positive point.

The Job Openings and Labor Turnover Survey (JOLTS) is expected to show available positions at 5.975 million for May, from 6.044 million in April. We will want to compare openings to hirings for signs of ongoing tightness in labor. The tighter the conditions, the more likely compensation inflation is on its way. We'll also study the "quits" data for employee confidence levels. The theory goes that quitters do so more often when they are confident they will find another job after they quit their current position.

Job openings have run at about a million above hirings, and signs of wage inflation have been showing up in other data. With Fed speakers on tap, all inflation signals get closer inspection.

On Tuesday, Fed Governor Lael Brainard addresses a conference on the very hot topic of normalization of central bank balance sheets. The market would like that process to be pushed out to December for its start, so any September signal is a stalling factor for stocks. Neel Kashkari, Minneapolis Fed President, is typically less jolting of a speaker, though he finds a microphone Tuesday too.

Tuesday's earnings highlights include AAR Corp (NYSE: AIR), Hingham Institution for Savings (Nasdaq: HIFS), PepsiCo (NYSE: PEP) and Yum! Brands (NYSE: YUM).

Wednesday has that special sort of swaying power for stocks, as the Fed Chair gives the semiannual monetary policy testimony before the House Financial Services Committee. Once known as the Humphrey Hawkins testimony, this is always a big event on the Fed calendar. Because congressmen are free to ask whatever they might, and due to their understanding that serious investors are watching and that the media will pick up powerful soundbytes for redistribution, they tend to ask important questions. So, you can expect the Fed Chair to be asked to respond to questions about risks to shrinking the Fed balance sheet and the risk of hiking rates before inflation materializes. You can expect the "R" word (recession) to be spoken, so how Janet Yellen responds matters.

Our fair Chairlady has typically offered measured diplomatic responses in the mold of her predecessor, but you never know. Sometimes they say things like "stocks are overvalued," and then it's repeated on ABC News and on the New York Times front page.

And if the testimony isn't enough to scare markets, well we still have to work our way through the Fed Beige Book release at 2:00 PM EDT, the Atlanta Fed Business Inflation Expectations Index, Kansas City Fed President Esther George's speech on the economic outlook and the balance sheet and the EIA oil inventory data. Wednesday sure feels like a risk-off definite from here, but if we get through it unscathed, well we'll have survived Wednesday, because Thursday and Friday are scary too.

Wednesday's earnings highlights include Bank of South Carolina (Nasdaq: BKSC), ClubCorp (Nasdaq: MYCC), Community Bancorp (OTC: OTCQX:CMTV), Fastenal (Nasdaq: FAST), Jewett-Cameron Trading Co. (Nasdaq: JCTCF), MSC Industrial Direct (NYSE: MSM), Omnicom Group (NYSE: OMC), Peregrine Pharmaceuticals (Nasdaq: PPHM), Simulations Plus (Nasdaq: SLP) and United Security Bancshares (Nasdaq: UBFO).

If you're looking for a reprieve after a long day Wednesday, you won't find it Thursday. Janet Yellen moves over to the Senate Banking Committee to continue her testimony. The same risks apply as were discussed for the House panel. On the day's Fed slate, also look for speeches from the Chicago Fed's Charles Evans and Lael Brainard again.

I will be a little more bothered Thursday by the reporting of the Producer Price Index. While it's not the market-moving event of its consumer-market sister, all inflationary measures are on the collective radar now. Economists are looking for the headline PPI to mark no change for June, but for Core PPI, which measures prices less changes to food and energy, economists expect a 0.2% increase. That would compare against the 0.3% increase reported in May. Core PPI is up 2.1% year-to-year, but other measures of inflation have not yet breached the Fed's 2.0% target bar.

Thursday's earnings highlights come from Access National (Nasdaq: ANCX), Ames National (Nasdaq: ATLO), Commerce Bancshares (Nasdaq: CBSH), Delta Air Lines (NYSE: DAL), Educational Development Corp. (Nasdaq: EDUC), Emmis Communications (Nasdaq: EMMS), Provident Bancorp (Nasdaq: PVBC), PacWest Bancorp (Nasdaq: PACW), Peak Resorts (Nasdaq: SKIS) and Value Line (Nasdaq: VALU).

Friday offers the Consumer Price Index (CPI), Retail Sales, Industrial Production, Business Inventories, Consumer Sentiment and the Baker Hughes Rig Count data.

Economists expect CPI to show a 0.1% increase in June, after the 0.1% decrease reported in May. Core CPI, less food and energy, is seen rising by 0.2%, versus the 0.1% increase seen in May. On a yearly basis, Core CPI is seen increasing 1.7%, still not there but on its way. If we see hotter than expected price increase, then the market will start to anticipate a more aggressive Fed tightening pace. That would spell trouble for stocks, so you'll want to pay close attention to this report.

Retail Sales reflect on consumer spending and general economic health. Economists expect retail sales to increase by 0.1%, following the 0.3% decline in May. Less autos and gasoline, a clean figure, retail sales are seen gaining by 0.4%, versus the stall in sales in May; that's better. Again, stronger economic data serves stocks and justifies Fed policy, but a failure to launch here hurts us significantly.

The rest of the day's data is important, but not market-moving in my opinion. Keep an eye on Consumer Sentiment (economists see it holding at 95.1) and on the Baker Hughes Rig Count data. Less drilling serves the energy sector through price reaction higher.

The day's earnings are light but significant, with Citigroup (NYSE: C), J.P. Morgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC) reporting. Many of the banks have already warned that their trading activities were costly to the bottom line this quarter, so analysts' expectations have likely been adjusted to reflect that. But, have they adequately incorporated it for all? Investors look ahead past quarterly swing factors like this, so the yield curve will matter more than anything else along with the prospect of tax reform this year. Also look for earnings data from PNC Financial Services (NYSE: PNC).

In conclusion, this week is all about inflation and the Fed, with far too many data points packed into the five day period. Stay attuned to the Fed Chair's testimony before Congress, because constituent sensitive representatives tend to ask hard questions of the Fed Chair. Any sign of heating inflation this week would work against stocks, so pay attention. Still, economic strength justifies the Fed's pace, and so retail sales and other relative data points matter as importantly. For more of my regular work on markets, readers are welcome to follow the column here at Seeking Alpha.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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