Quincy Krosby: Market will focus on inflation, retail sales, consumer sentiment and tax reform headlines

There is much for the market to absorb this week, particularly on inflation data, retail sales and consumer confidence, Prudential's Chief Market Strategist Quincy Krosby said Monday in her weekly 'Connecting the Dots' outlook. With investors expecting the Fed to raise rates in December, two inflation-related data releases this week-Tuesday's Producer Price Index (PPI-FD) and Wednesday's Consumer Price Index (CPI)-will offer more clarity on inflation. Should inflation shift lower, the Fed funds futures market could move from its current 80-plus percent probability of a December rate hike to a markedly less certain stance. Moreover, the yield curve could respond by flattening, she said. 'Chair Yellen believes that inflation will start to kick in and doesn't want to be behind the curve, because if that happens the Fed will have to raise rates faster,' Krosby said. 'This week will be a true test to see what the market thinks is going to happen in December.' Retail sales data on Wednesday, coupled with earnings reports and guidance from Walmart, Target and Home Depot, will shed light on the all-important U.S. consumer. 'Consumer spending makes up 71% of our economy,' Krosby said. 'Retail sales give us a picture of how the U.S. consumer sees his or her financial situation in terms of actual spending behavior.'

With the release of the Senate's tax reform plan highlighting important differences from the House of Representative's version, the equity markets appear vulnerable to headlines, particularly concerning the corporate tax provision. The high yield market may also come under pressure as it did last week, especially if reports continue to suggest a cap on the deductibility of interest payments. The movement of the high-yield market is often a warning sign for equity markets, so investors will keep their eyes on high-yield performance, as well as small- and mid-cap performance.
The reaction of small business owners should also not be overlooked. 'Small business owners are very much attuned to what the tax reform package will offer them,' Krosby said. 'Small business is important to this economy because two out of every three new jobs has come from a small business owner.' The White House, she adds, will follow the NFIB Small Business Optimism Index very closely on Tuesday.
In addition to the PPI-FD and CPI, important data releases will include manufacturing numbers from Wednesday's Empire State Manufacturing Survey, Thursday's Industrial Production report and Friday's Kansas City Fed Manufacturing Index. Housing data will be followed closely from the Housing Market Index on Thursday and Housing Starts on Friday. The Philadelphia Fed Business Outlook Survey will also be released on Thursday.
To talk to Quincy Krosby about her views of the market, contact Lisa M. Bennett or Dara Scerbo.

Read Quincy Krosby's full Q4 Market Commentary: The End Game