What to know this week

An already strained U.S. stock market will be further challenged in the week ahead as the government publishes a key inflation report and megabanks kick off what’s likely to be a murky earnings season.

The highly-awaited Consumer Price Index (CPI) takes top billing in coming days, with third-quarter financials from the country’s largest banks – JPMorgan (JPM), Citi (C), and Wells Fargo (WFC) – following suit in the line of importance.

A fresh CPI reading on Thursday is expected to dictate how much more aggressive the Federal Reserve will get with its interest rate hiking plans, which are already the most combative in decades. The consequential economic release will hold even greater significance after the Labor Department’s September jobs report on Friday suggested officials have further room for increases.

JPMorgan President and CEO Jamie Dimon testifies on Capitol Hill in Washington, U.S., September 22, 2022. (REUTERS/Evelyn Hockstein)

The U.S. economy added 263,000 jobs last month, a moderation from the prior print but still a robust hiring figure, as the unemployment rate fell to 3.5%. The weaker-than-expected decline in payroll gains dashed investor hopes that FOMC members might shift away from monetary tightening sooner than anticipated.

That reality sent stocks spiraling on Friday. The S&P 500 (^GSPC) plunged 2.8%, the Dow Jones Industrial Average (^DJI) shed 630 points, and the Nasdaq Composite (^IXIC) led the way down at a decline of 3.8%. The major averages managed to end higher for the week after three straight down weeks after retaining some gains from a transient rally the first two trading days of October.

“Persistent strength in hiring and a drop in the unemployment rate, in our view, mean the Fed is unlikely to pivot in the direction of a slower pace of rate hikes until it has more clear evidence that employment growth is slowing,” analysts at Bank of America said in a note on Friday, adding that the institution expects a fourth 75-basis-point rate increase in November.

And this week’s inflation reading could corroborate such a move next month. According to Bloomberg forecasts, the headline consumer price index for September is expected to show a slight moderation on a year-over-year figure to 8.1% from 8.3% in August, but an increase to 0.2% from 0.1% over the month.

All eyes will be on the “core” component of the report, which strips out the volatile food and energy categories. Economists surveyed by Bloomberg project core CPI rose to 6.5% from 6.3% over the year but moderated to 0.4% monthly from 0.6% in August.

Marginal fluctuations in the data have not been reassuring enough to Federal Reserve members that they can step away from intervening any time soon. Speaking at an event in New York last week, Federal Reserve Bank of San Francisco President Mary Daly called inflation a “corrosive disease,” and a “toxin that erodes the real purchasing power of people.”

A sign for the Federal Reserve Board of Governors is seen at the entrance to the William McChesney Martin Jr. building ahead of a news conference by Federal Reserve Board Chairman Jerome Powell on interest rate policy, in Washington, U.S., September 21, 2022. REUTERS/Kevin Lamarque

A sign for the Federal Reserve Board of Governors is seen at the entrance to the William McChesney Martin Jr. building ahead of a news conference by Federal Reserve Board Chairman Jerome Powell on interest rate policy, in Washington, U.S., September 21, 2022. REUTERS/Kevin Lamarque

Elsewhere in economic releases, investors will also get a gauge of how quickly prices are rising at the wholesale level with the producer price index, or PPI, which measures the change in the prices paid to U.S. producers of goods and services; a reading on how consumer spending is faring amid persistent inflation and slowing economic conditions with the government’s retail sales report; and a consumer sentiment check from the University of Michigan closely watched survey.

Meanwhile, bank earnings will set the stage for a third-quarter earnings season expected to be ridden with economic warnings from corporate executives about the state of their businesses, slashed earnings per share estimates across Wall Street, and generally milder results as price and rate pressures weighed on companies in the recent three-month period.

Results from JPMorgan, Citigroup, Wells Fargo, and Morgan Stanley are all on tap for the coming week and will be followed by Goldman Sachs (GS) and Bank of America (BAC) the following week.

Chief executives of the country's largest banks are sworn-in at the start of a Senate Banking, Housing, and Urban Affairs hearing on

Chief executives of the country’s largest banks are sworn-in at the start of a Senate Banking, Housing, and Urban Affairs hearing on “Annual Oversight of the Nation’s Largest Banks”, on Capitol Hill in Washington, U.S., September 22, 2022. REUTERS/Evelyn Hockstein

Banks typically benefit from central bank policy tightening, with higher interest rates boosting their net interest income (the bank’s earnings on its lending activities and interest it pays to depositors) and net interest margins (calculated by dividing net interest income by the average income earned from interest-producing assets.) However, challenging market conditions that have dealt a blow to dealmaking activity and general macroeconomic uncertainty are poised to offset higher net interest income.

Analysts at Bank of America project earnings growth to slow across banks and brokers to 2.0% year-over-year in the third quarter from 5.9% in the second and 7.7% in the third, per bottom-up consensus estimates, per a recent note.

However, that drop pales in comparison to expectations for sectors outside of financials — with the exception of the energy sector — according to BofA. Earnings growth in those areas “is expected to dip well into the negative territory,” the bank warned in a note, with expectations for growth of -4.2% year-over-year in the third quarter, down from -1.3% in the second quarter.

Economic Calendar

Monday: No notable reports scheduled for release.

Tuesday: NFIB Small Business Optimism, September (91.8 expected, 91.8 during prior month); Monthly Budget Statement, September (-$219.6 billion)

Wednesday: MBA Mortgage Applications, week ended Oct. 7 (-14.2% during prior week); PPI excluding food and energy, year-over-year, September (7.3% expected, 7.3% during prior month); PPI final demand, month-over-month, September (0.2% expected, -0.1% during prior month); PPI excluding food and energy, month-over-month, September (0.3% expected, 0.4% during prior month); PPI excluding food, energy, and trade, month-over-month, September (0.2% expected, 0.2% during prior month); PPI final demand, year-over-year, September (8.4% expected, 8.7% during prior month); PPI excluding food, energy, and trade, year-over-year, September (5.6% during prior month); FOMC Meeting Minutes, September 21

Thursday: Consumer Price Index, month-over-month, September (0.2% expected, 0.1% during prior month); CPI excluding food and energy, month-over-month, September (0.4% expected, 0.6% during prior month); Consumer Price Index, year-over-year, September (8.1% expected, 8.3% during prior month); CPI excluding food and energy, year-over-year, September (6.5% expected, 6.3% during prior month); CPI Index NSA, September (296.417 expected, 296.171 during prior month); CPI Core Index SA, September (296.950 during prior month); Initial jobless claims, week ended Oct. 8 (225,000 expected, 219,000 during prior week); Continuing claims, week ended Oct.1 (1.361 during prior week); Real Average Weekly Earnings, year-over-year, September (-3.4% during prior month)

Friday: Retail Sales Advance, month-over-month, September (0.2% expected, 0.3% during prior month); Retail Sales excluding autos, month-over-month, September (-0.1% expected, -0.3% during prior month); Retail Sales excluding autos and gas, month-over-month, September (0.3% during prior month); Retail Sales Control Group, September (0.0% during prior month); Import Price Index, month-over-month, September (-1.1% expected, -1.0% during prior month); Import Price Index excluding petroleum, month-over-month, September (-0.2% during prior month); Import Price Index, year-over-year, September (7.8% during prior month); Export Price Index, month-over-month, September (-1.2% expected, -1.6% during prior month); Export Price Index, year-over-year, September (10.8% during prior month); Bloomberg Oct. United States Economic Survey; Business Inventories, August (0.9% expected, 0.6% during prior reading); University of Michigan Consumer Sentiment, October preliminary (58.8 expected, 58.6 during prior month)

Earnings Calendar

Monday: No notable reports scheduled for release.

Tuesday: AZZ (AZZ), Pinnacle Financial Partners (PNFP)

Wednesday: PepsiCo (PEP), Duck Creek Technologies (DCT)

Thursday: BlackRock (BLK), Delta Air Lines (DAL), Progressive (PGR), Walgreens Boots Alliance (WBA), Commercial Metals (CMC), Taiwan Semiconductor (TSM)

Friday: JPMorgan (JPM), Citigroup (C), Morgan Stanley (MS), PNC (PNC), U.S. Bancorp (USB), UnitedHealth (UNH), Wells Fargo (WFC)

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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