Traders this week will turn their attention to another set of inflation data, though signs of a pronounced rise will likely be elusive for at least another month. A handful of earnings reports are also set for release.
On Friday, the U.S. Bureau of Economic Analysis will release its report on February personal consumption expenditures (PCE), or the change in value of goods and services purchased by the U.S. consumer. The core measure of PCE, which excludes more volatile food and energy prices, serves as the Federal Reserve’s preferred gauge of underlying inflation in the U.S. economy.
Consensus economists expect to see headline PCE to rise by just 0.3% month-over-month to match January’s tepid rate. Core PCE likely rose by an even smaller margin, or by 0.1% following a 0.3% January rise, according to consensus. And over last year, core PCE is expected to have risen by only 1.5%, holding well below the Federal Reserve’s 2% target as it has for years.
But with the post-pandemic economic recovery under way — and not to mention trillions more pumped into the economy via the latest coronavirus relief package — many investors have been nervously looking for signs of rapid inflation. This, some fear, might prompt a tightening of financial conditions by the Federal Reserve and an increase in borrowing costs for companies and consumers. Signs of core PCE inflation are likely to start pushing decidedly higher this spring, since the year-over-year data will lap the depressed levels from the same period in 2020 when the start of the coronavirus pandemic weighed pronouncedly on economic activity.
Given these base effects, the Federal Reserve has maintained that inflation this year will be “transitory,” and will attenuate in the coming years. Still, the Fed earlier this month upgraded its outlook for core PCE inflation to 2.2% this year, from the 1.8% rise it saw in its December projection. The Fed has targeted 2.0% core PCE inflation, but has suggested it would tolerate above-target inflation for some time to compensate for years of undershooting in inflationary pressures.
“Lift-off will not occur until the Fed becomes convinced this year’s temporary increase in inflation has been followed up by a more persistent inflation push modestly above its 2% target. This implies actual inflation will need to push beyond 2% for an extended period before the Fed will consider hiking short rates,” Steven Ricchiuto, U.S. chief economist for Mizuho Securites USA, said in a note on Friday. “Given the Fed’s recent forecast calls for its key inflation measure, the personal consumption expenditures deflator, to average only 2.0%-2.2% in 2023, lift-off is likely to occur later than is generally expected.”
Still, markets have suggested they will need to see more proof. The benchmark 10-year Treasury yield broke to a more than one-year high of 1.75% last week, climbing by nearly 50 basis points from levels one month ago, in anticipation both of a strong economic recovery and of firming inflation.
“The Fed tends to think as an economist, and economists look through changes over time. Markets tend to live more in the moment,” Mohamed El-Erian, Allianz chief economic advisor, told Yahoo Finance on Thursday.
“If inflation is going up, the marketplace is saying, I’m not so sure it’s transitory. Prove to me it’s transitory. And that’s the difficulty the Fed has,” he added. “We are seeing supply bottlenecks multiply. And for me, I do think inflation will go up. I do think it’s not going to be a permanent inflationary process. But the market is not going to look through that as easily as the Fed would like it to.”
While the fourth-quarter corporate earnings season has slowed down, a small number of notable companies are still set to report results this week.
GameStop (GME), the poster child for the latest surge in retail investor interest in the stock market, is set to report fourth-quarter results Tuesday afternoon.
However, in the eyes of many Wall Street analysts, GameStop shares have not been trading according to fundamentals like earnings results this year. Instead, shares have been pushed astronomically higher by a frenzy of speculative interest among traders, many of whom have convened on forums like Reddit to discuss the potential for the stock.
The stock was identified as a target for a short squeeze in January due to its elevated short interest, prompting a flood of purchases to force shorts to cover their bets and push the stock still-higher. The stock peaked at $483 intraday on January 28, after closing the final trading day of 2020 at just $18.84. Shares have since come back down to $202.44 apiece, holding onto a year-to-date gain of 970%.
With a market capitalization hovering around $14 billion as of Friday, it has quickly vaulted to become one of the biggest companies in the small-cap Russell 2000 index (^RUT). The volatile trading prompted two hearings from the House Financial Services Committee, as well as increased scrutiny into the trading platform Robinhood, which temporarily restricted trading in GameStop and some other stocks in January as a result of the unprecedented volatility.
But while speculative interest has been cited as the primary driver of GameStop’s stock moves over the past three months, news from the company itself has also catalyzed changes in the stock price. GameStop announced in early February that it had brought on Matt Francis, a former engineering leader from Amazon Web Services, as its first-ever chief technology officer. Later that month, the company announced its Chief Financial Officer Jim Bell would be resigning — news that was taken as a positive by investors on social media, and catalyzing a more than doubling in the stock at the time.
Some investors have purported that GameStop was a long-term investment and recovery play after a weak 2020, when the coronavirus pandemic decimated business for it and other brick-and-mortar retailers. Keith Gill — the user known as “Roaring Kitty” on some social media platforms, and whose posts and comments have been viewed as a galvanizing force behind the GameStop rally — told the House Financial Services Committee in February that he believed the company had “a unique opportunity to pivot toward a technology-driven business,” and that “by embracing the digital economy, GameStop may be able to find new revenue streams that vastly exceed the value of its business.”
Most Wall Street analysts, however, are not convinced. The stock had zero Buy, 4 Hold and 3 Sell ratings as of Friday, according to Bloomberg data. Some firms, including Loop Capital Markets, suspended coverage of the stock in the wake of the January rally, citing a massive disconnect between the stock’s fundamentals and valuation.
Consensus analysts expect GameStop to report revenue of $2.21 billion for the three months ending in January. That would mark a rise of 1% over the same period last year, and end an eight-quarter streak of declining revenues. Adjusted earnings likely totaled $1.43 per share, according to consensus estimates. Net income likely totaled $106.9 million in the fourth quarter, though the company is expected to still post its third consecutive full-year net loss at $188.7 million.
Monday: Chicago Fed National Activity Index, February (0.72 expected, 0.66 in January); Existing home sales, February (-2.8% expected, 0.6% in January)
Tuesday: Current account balance, 4Q (-$188.5 billion expected, -$178.5 billion in 3Q); New home sales, February (-4.6% expected, 4.3% in January); Richmond Fed Manufacturing Index, March (18 expected, 14 in February)
Wednesday: MBA Mortgage Applications, week ended March 19 (-2.2% during prior week); Durable goods orders, February preliminary (0.9% expected, 3.4% in January); Durable goods orders excluding transportation, February preliminary (0.6% expected, 1.3% in January); Non-defense capital goods orders excluding aircraft, February preliminary (0.7% expected, 0.4% in January); Non-defense capital goods shipments excluding aircraft, February preliminary (1.8% in January); Markit U.S. Manufacturing PMI, March preliminary (59.5 expected, 58.6 in February); Markit U.S. Services PMI, March preliminary (60.0 expected, 59.8 in February); Markit U.S. composite PMI, March preliminary (59.5 in February)
Thursday: Initial jobless claims, week ended March 20 (728,000 expected, 770,000 during prior week); Continuing jobless claims, week ended March 13 (4.124 million during prior week); GDP annualized quarter-over-quarter, 4Q third print (4.1% expected, 4.1% in prior print); Personal consumption, 4Q third print (2.4% expected, 2.4% in prior print); Core PCE quarter-over-quarter, 4Q third print (1.4% expected, 1.4% in prior print); Kansas City Fed Manufacturing Activity, March (25 expected, 24 in prior print)
Friday: Advance goods trade balance, February (-$85.5 billion expected, $83.7 billion in January); Wholesale inventories, month-over-month, February preliminary (1.3% in January); Personal income, February (-7.0% expected, 10.0% in January); Personal spending, February (-0.8% expected, 2.4% in January); Personal consumption expenditures (PCE) deflator, month-over-month, February (0.3% expected, 0.3% in January); PCE deflator, year-over-year, February (1.5% expected, 1.5% in January); PCE core deflator, month-over-month, February (0.1% expected, 0.3% in January); PCE core deflator, year-over-year, February (1.5% expected, 1.5% in January); University of Michigan sentiment, March final (83.5 expected, 83.0 in prior print)
Thursday: Darden Restaurants (DRI) before market open
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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