Week ahead: Inflation and recession indicators in focus

The Fed’s preferred gauge of inflation, the core PCE index, is out this week as markets remain on edge about rising interest rates and signs of recession. There will also be data on US durable goods and manufacturing activity. On the earnings front, Nike is set to report. Also watch out for the G7 summit in Bavaria starting on Sunday, where leaders will discuss Ukraine, inflation and the price of oil.

Inflation

With market participants fixated on inflation, recession and what the Federal Reserve is doing, the main event this week is the PCE index release on Thursday. Markets will be watching for any signs that price rises are slowing down. The core personal consumption expenditures (PCE) price index rose 4.9% from a year ago in April, down from 5.2% in March. Headline PCE rose just 0.2% month-on-month, well down from March’s 0.9% increase.

Speaking last week, Fed chair Jay Powell admitted there were not any clear signs inflation was coming down just yet, but he did point to last month’s PCE index as a sign of hope. “Over coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2%,” Powell said. “We anticipate that ongoing rate increases will be appropriate; the pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy.”

Other releases to watch include, on Monday, US durable goods orders and pending home sales, followed by the CB Consumer Confidence survey on Tuesday. Then on Friday the ISM manufacturing report is due.

Bank of England

UK inflation rose to a new 40-year high in May, and is set to hit 11% later this year, according to the Bank of England. Little wonder that so many people in the market believe the BoE might need to go faster and further on hiking interest rates. So markets will be paying close attention to Governor Andrew Bailey on Wednesday, when he delivers a speech on “Challenges for monetary policy in a rapidly changing world” at the ECB forum for central banking, in Sintra.

Nike earnings

Retailer Nike is set to report 4th quarter earnings on Monday. Supply chain problems are likely to feature heavily as the company faces headwinds from lockdowns in China, whilst analysts have also cited the strong dollar as a drag. Morgan Stanley expects to see a Q4 earnings miss due to the “longer-than expected Covid-related” lockdowns. However, there should be some offsetting influence from the shift to direct-to-consumer, which is supporting margins.

In the prior quarter reported in March, Nike shrugged off supply troubles to grow North American sales by 9%, apparently showing it can handle supply disruption and rising input costs. More direct-to-consumer sales is a big help. Digital sales in the last quarter rose 19% from the prior year, driven by 33% growth in North America. As a result, gross margins rose to 46.6% from 45.6% a year ago. Earnings per share came in at $0.87 vs $0.71 expected on revenues of $10.87bn.

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