On Friday, two very smart guys, both presidents of Federal Reserve banks, went on television together to say inflation is confusing.
And they want more information, a lot more information, before they'll be ready to decide on interest-rate cuts.
Austan Goolsbee, who heads the Chicago Federal Reserve Bank of Chicago, and Neel Kashkiri of the Federal Reserve Bank of Minneapolis, will get a lot of important data to examine this week.
The two big reports will offer snapshots of the conundrum of rising prices, an issue that has obsessed the Federal Reserve for more than two years.
With these reports will come another big tub of earnings reports during the week. The biggest reports will come from Walmart (WMT) on Thursday. That report will follow results from Home Depot (HD) on Tuesday and Cisco Systems (CSCO ) on Wednesday.
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The reports should offer a view on what the companies are seeing and hearing from their customers in terms of confidence about the present and the future.
And markets will react. Possibly higher if the earnings numbers are decent, which wouldn't bother Goolsbee and Kashkari.
But it's the inflation data that concern them all the time. "The job of a central banker is to be paranoid about everything," Goolsbee said an interview he and Kashkari had with CNBC's Steve Liesman.
Goolsbee was a key economic advisor in the Obama Administration.
Kashkari played a key role in the Bush Administration's efforts to stabilize the nation's banking system in the 2008-2009 financial crisis.
This week's reports almost surely won't be enough to get the Fed to cut rates right now. Maybe in September, if predictions from the CME Group's FedWatch tool prove out, and one or two more cuts before the end of 2024.
Bad reports, however, will delay the rate cuts, maybe into 2025, and possibly turn sporadic reports of economic slowing into something more serious.
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The Fed wants to see long strings of data showing inflation moving surely toward the Fed's goal of 2% annual inflation. It absolutely does not want inflation rising as it did in the summer of 2022 when the CPI briefly hit a year-over-year rate of 9.1%.
That's why the central bank raised its key federal funds rate 11 times to 5.25% to 5.5% by July 2023. Loan rates jumped. Mortgage rates jumped to 6% by the summer of 2022 and flirted with 8% in the fall of 2023. That compares with as low as 2.8% in the summer of 2021.
Lo and behold, inflation came down, especially in the latter half of 2023.
When 2023 turned into 2024, however, inflation stopped falling.
Why inflation is stuck
Right now, inflation is down to between, say, 2.5% and 3.5%, depending what you're measuring. But it's not enough. The other forces at work:
- Food-price inflation has been high.
- Apartment rents, which represent about a third of the Consumer Price Index, have barely budged.
- This is due to surprisingly strong demand for rental housing especially from people who want to buy a home but can't. So, they're staying put. Immigration is also fueling demand.
The Fed has been expecting rent rates to fall as more apartments come online and existing tenants buy homes.
The last thing the Fed really wants to see is inflation rates starting to rise again. Which is why Kashkari said Friday, "I'm in wait and see mode."
Would Goolsbee or Kashkari vote to raise rates? Waiting for current interest rates to slow the economy seemed to be their preferred option.
Producer and consumer prices count
The two inflation reports coming this week work in tandem and tell markets, companies and everyday folks two things:
- The Producer Price Index measures the inflation that will hit consumers next. The report is due before Tuesday's open.
- The Consumer Price Index, due Wednesday, measures the inflation consumers are already experiencing.
The PPI has surprised investors this year with its signals of prices for goods that won't keep falling.
The CPI has shown the stubbornness of the now: Higher food and gasoline prices. The rent problem.
More Economic Analysis:
- Watch out for 8% mortgage rates
- The Haves and Have Nots of This Economy
- Inflation report will disappoint markets (and the Fed)
The combination of both has put consumers in a foul mood, at least according to the University of Michigan's Consumer Sentiment Report released this past Friday.
The survey suggested growing concern about inflation, unemployment and interest. This concern is especially sharp in Western states and really sharp among respondents who said they were Republicans.
Stocks move higher; rates and oil ease
Despite the collective angst, stocks had a good week with the Standard & Poor's 500 index adding 1.9%. The Dow Jones Industrial Average rising 2.2%, and the Nasdaq Composite Index moving up 1.1%.
Interest rates fell a little, with the 10-year Treasury yield at 4.5%, down from 4.52% a week earlier. Mortgage rates drifted lower but are still mostly above 7%.
Lastly, oil and gasoline prices were flat to a touch lower. Crude oil ended the week at $78.26 a barrel, up just 0.2% on the week. The AAA gasoline price was at $3.636 a gallon as of Saturday, down nearly 1% for the month but up 16.5% so far this year.
(Gasoline prices have distinct patterns: Rising in spring, peaking in summer and falling in the fall.)
The Dow has offering bullish signals of late. The index has risen for eight straight days, ending Friday roughly 400 points under 40,000, a level it couldn't quite reach in March.
The Dow has also risen for four straight weeks, though the first weekly gain was all of 3 points — not even one one-hundredth of a percentage point.
The S&P 500 and the Nasdaq have moved higher for three straight weeks.
What Home Depot, Cisco and Walmart will say
One can hear plenty of talk already about the upcoming results of AI and technology companies. Nvidia (NVDA) will report on May 22.
Walmart and Home Depot, however, will offer a snapshot of what real folks are doing every day with their money.
The odds are each will note that the consumer is prepared to spend. But, regardless of income level, the consumer has been buying stuff more carefully in the last year or so but even more so in 2024.
The key question for the companies' earnings will be how this frugalness trend will affect either revenue or earnings.
Walmart: The retail giant is expected to report 52 cents a share on revenue of $159.2 billion. A year ago, Walmart earned 49 cents on sales of $152.3 billion. It has effectively competed against the likes of Amazon (AMZN) and Target (TGT) and others by embracing online sales, grocery and other goods and services.
Its Sam's Club warehouse business is designed to take on Costco Wholesale (COST) .
The shares are up about 2% in May after falling 1.4% in April. For the year, Walmart is up 15.1%.
Home Depot: The leader in building materials retailing, Home Depot is projected to report $3.61 a share on revenue of $36.7 billion, down from $3.82 and $37.3 billion a year ago. Share are unchanged so far this year.
Home Depot is widely admired for its use of technology throughout the organization that's worked well competing against Lowe's (LOW) and other big-box building stores.
But all of the players in the segment are dependent on housing activity, which has been hit by high mortgages rates that have crimped home sales.
Cisco Systems: Cisco developed the technologies to allow companies build vast networks to communicate with staff and customers. The challenge it faces now is pivoting to handle the vast changes coming from artificial intelligence.
It spent $28 billion in 2023 to buy cybersecurity company Splunk and recently announced a new product called HyperShield to help customers protect their systems against cyber criminals.
Still, the pivot to the AI world has been painful. Analysts see Cisco reporting 83 cents a share in earnings in its fiscal third quarter, down from $1 a year ago. Analysts see revenue at $12.5 billion, down from $14.6 billion a year ago.
Also reporting this week:
Monday: Petrobras (PBR) , the Brazilian oil giant. Tencent Music Entertainment (TME) , and Legend Biotech (LEGN) .
Tuesday: Online retailer Ali Baba Group (BABAF) , Sony Group (SNEJF) .
Wednesday: ZTO Express (ZTO) and Grab Holdings (GRAB) .
Thursday: Applied Materials (AMAT) and farm-equipment giant Deere & Co. (DE) .
Friday: Hotel giant H World Group (HTHT)
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