Can U.S. stocks continue their rally? Inflation worries lingered ahead of key jobs data.

Investors took a breather this week as U.S. stocks rebounded from a week-long sell-off and the latest inflation data brought a tinge of optimism to those hoping for a peak in price pressures.

Beneath the surface, however, concerns about inflation remain.Fed data for April The preferred indicator shows inflation slowing, But on its own, it’s not enough to settle the debate over where the price hikes are coming from. Stocks typically bounce back, even if they’ve entered or headed for a bear market, said Wayne Wicker, chief investment officer with $33 billion under management at Washington-based MissionSquare Retirement.

As the S&P 500 and Nasdaq break a seven-week losing streak, the Dow Jones Industrial Average DJIA,
+1.76%
Friday’s eight-week losing streak ended, and it may be easy to ignore the recent volatility that has plagued financial markets since mid-May.

Look: Why the Dow is finally bouncing back — and how to convince investors it’s real

However, history suggests that inflation can persist long after the Fed starts raising rates. consumer sentiment Currently at 10-year lows, and falling corporate profit margins is another threat to the S&P 500 SPX,
+2.47%,
John Higgins of Capital Economics said he sees the index bottoming at 3,750 from Friday’s close of nearly 4,158.

like a company’s ability target company
TGT,
+2.41%
or
Snap Inc.
break,
+5.20%
Publish loss announcements or warnings with wider triggers
stock sell-off This marks a clear shift in the market’s view of hidden inflation and could make parts of next week’s nonfarm payrolls report stale.

Scott Ruesterholz, a portfolio manager at Insight Investment who manages $1.1 trillion in assets, noted that the number of tech companies that have announced layoffs or hiring freezes since May 12, and other businesses with employee stress relief may not be in sight for several months. official data.

“The volatility caused by individual company announcements is the largest since 1987,” Ruesterholz said by phone. “The reason for such a big move is our lack of confidence in the inflation outlook.”

“Many times, the job market tends to lag a turn in the economy, especially during periods of extreme volatility,” said the New York-based portfolio manager, who believes the U.S. labor market has peaked. “The importance of the jobs data is going to be a little less, especially if it’s strong, because you’re going to wonder if that’s still the case today.”

Ruesterholz said he expects wage growth to fall to 275,000 in May 428,000 last month, which fell short of the consensus estimate for a gain of 325,000 jobs in a Wall Street Journal survey of economists.data will be Post next FridayIn addition, he said, “the market may be ignoring the payroll numbers” while focusing more on the average hourly earnings reading, which he expects to slow.

Many investors believe that Fed policymakers may need to stop raising interest rates sharply by the end of the year given the possible impact on economic growth, contributing to this week’s stock market rally.traders have pull back On how high they expect the main policy rate target to reach in 2022.

“The notion that the Fed is going to exit for some reason is completely false,” said Thomas Simons, money market economist at Jefferies. “The Fed is more concerned with inflation than worrying about future deflation in financial markets.”

Fixing traders expect a five-fold increase in the annual headline CPI reading from May to September, with one question being whether consumers can weather a further rise in inflation and continue to support growth for the rest of the year and 2023. , Simmons told MarketWatch.

At the same time, “the negative sentiment will continue for a while,” Simmons said. “Financial assets are going to look very, very cheap at some point, and I think stocks will have some support even during periods of sideways markets.”

Despite a rebound in U.S. stocks this week, the Nasdaq Composite,
+3.33%
Still in a bear market, down more than 20% from its peak, while the S&P 500 flirt briefly with one. This is the case even with the Fed raising rates only twice, with the federal funds rate target between 0.75% and 1%. Traders see a more than 50% chance that the Fed will raise its target for the federal funds rate to 2.5% to 2.75% by December, and policymakers have acknowledged they may raise rates several times.

Federal Reserve data released on Friday Preferred Inflation MeterPrice pressures, known as the Personal Consumption Expenditure Price Index, eased in April. Inflation over the past year slowed to 6.3% last month from a 40-year high of 6.6% in March, the first decline in a year and a half.However, investors have seen “Fake Head” Before, when a seemingly tame inflation figure overshadowed a larger still rapidly rising costs.

Recent financial market volatility has provided some guidance on how quickly investors are willing to ignore positive economic data in a higher inflation environment.A good example is April retail sales Data on May 17 climbed 0.9%, giving many investors reason to think the economy remains vibrant.stock investor happy to hear That day, I saw the Dow Glide nearly 1,200 points On May 18, it recorded its biggest one-day slump in about two years as concerns over stagflation dominated and rising costs eroded retailers’ quarterly profits.

However, the decline in the value of most stocks “can be entirely explained by falling multiples, not earnings,” said Ed Al-Hussainy, senior rates and currency analyst at Columbia Threadneedle Investments in New York. It was $699 billion as of March.

related: Here’s the real reason the stock market is degumming — and it’s not because of weak earnings

More than half of the S&P 500’s strongest days in the past 20 years have occurred during bear markets, said Wicker of MissionSquare Retirement. “So even after a week like this, it’s entirely possible that we’ll see more volatility that could send the market lower in the coming months,” he said.
“Next week’s labor market data does bring attention to the Fed meeting and the current direction of inflation.”

The May nonfarm payrolls report due on June 3 is the highlight of the holiday-shortened week.U.S. financial markets, including the New York Stock Exchange, will be closed on Monday Memorial Day.

If employment growth surprises, coupled with a larger-than-expected drop in the unemployment rate from April’s 3.6% level, “this strengthens the case for rapid monetary tightening, with the Fed raising rates by 50 basis points each. June and July,” said Bill Adams, chief economist at Comerica Bank in Toledo, Ohio. If the pace of job growth continues between now and the next few months, policymakers could raise rates by another half a percentage point in September, he said.

By contrast, Adams said on the call that a major misstep would mean “less urgency to get rates back above 2% or 3%” — meaning a pause or scaling back.

U.S. data on Tuesday includes the S&P CoreLogic Case-Shiller national home price index for March, the Chicago Purchasing Managers’ Index for May and the Conference Board Consumer Confidence Index for May. The next day will be the S&P Global U.S. Manufacturing PMI, ISM Manufacturing Index and the Fed’s Beige Book report for May, as well as data on job openings, departures and construction spending for April.

Data on Thursday included Automatic Data Processing’s May private sector employment report, weekly initial jobless claims and revisions to first-quarter productivity and unit labor costs.

Friday will bring May data from the Labor Department on the U.S. unemployment rate, average hourly earnings, labor force participation rate, the S&P Global U.S. Services PMI for May, and the ISM Services Index.