Stimulus prospects could boost the stock market and interest rates in the week ahead

The prospects of a big government spending program could continue to boost the stock market and put upward pressure on interest rates in the week ahead.

Earnings season is beginning to wind down, but some big names have yet to report.

Walmart‘s earnings on Thursday should provide a good window into the consumer, as should the government’s retail sales report for January, also expected Wednesday.

The Federal Reserve releases minutes from its last meeting on Wednesday afternoon, and investors will dig into those for any insight into the central bank’s view on inflation.

Inflation and rising interest rates have been two dominant themes for investors recently and have become increasingly so as the market has upgraded its view of how much fiscal stimulus could be signed into law.

“The market is waiting to see how big the package is going to be. It’s going to be important. They can get it through reconciliation,” said Quincy Krosby, chief market strategist at Prudential Financial.

Krosby said that Democrats could pass the stimulus under budget reconciliation, which means they could approve it with a simple majority instead of relying on negotiations with Republicans.

Some in the markets had anticipated a package of $1 trillion or less if there was a negotiated deal, but that now looks unlikely. Strategists have changed their view on the proposed $1.9 trillion package.

“There is less pushback to President Biden’s proposed stimulus from moderate Democrats than we expected, so a price tag of around $1.5 trillion seems likely, which is higher than we initially thought,” note Cornerstone Macro policy analysts.

They say they expect a bill to come to the floor during the week of Feb. 22, and that it could become law by the first week of March. Investors will stay focused on its progress through Congress.

Market pros expect the bigger the spending package, the larger the pop will be in economic growth in the near-term. That has helped send Treasury yields, which move opposite price, to higher levels.

It has also increased concerns for inflation.

In the past week, the 10-year yield — a key benchmark — touched 1.2% for the first time since March. It touched that level briefly early in the week but returned to it in the final hour of trading Friday.

Yields are rising on optimism for an improving economy, but also as inflation expectations also move higher.

“If you think about the big drivers, they’re related – vaccines, stimulus and inflation,” said Michael Schumacher, head of rate strategy at Wells Fargo Securities. “If there’s more talk out of D.C. about moving the stimulus package forward, that sets the stage for yields to go up.”

The market is concerned about the economy running hotter, since it could be a trigger to change Fed policy.

At the same time, the Fed has said it would tolerate inflation above its 2% target.

Krosby of Prudential Financial said the market will also pay attention to the producer price index Wednesday even though it is not typically a big factor.

“Because there’s such a debate on inflationary trends,  I know the CPI [consumer price index] came in comfortable, but the producer price index is coming in and we’ll see if that has eased,” she said.

“Obviously supply chains are being re-established and inventories are building,” said Krosby.

Consumer inflation was running at an annual pace of 1.4% in January.

Housing data is also dominant on the calendar in the holiday-shortened week.

The National Association of Home Builders releases its housing market index data on Wednesday, a measurement of sentiment around market conditions for new home sales.

On Thursday, the government will issue data on pending home sales and building permits. Finally, the National Association of Realtors will release existing home sales data on Friday.

Stocks were higher in the past week, with energy, tech and financials as the best performers. The S&P 500 rose 1.2%, ending the week at 3,934.

There were some market hot spots, like cannabis shares which became the latest target of the Reddit trading community. The stocks shot higher Wednesday, adding to already lofty gains in recent weeks before giving up some of those gains.

Investors will also be focused on the Thursday hearing before the House Financial Services Committee on the wild trading recently in GameStop and other heavily-shorted names.

Robinhood’s CEO is expected to testify, as are executives from Melvin Capital Management and Citadel.

The frenzied activity in some small and shorted stocks has raised concerns about the market becoming overheated. But Ari Wald, head of technical analysis at Oppenheimer said the broader market’s advance is intact.

“Overall, it’s a bull market. I think the steadiness of the advance is underappreciated,” Wald said. He said the market technicals are healthy. Breadth is broad-based and there’s cyclical leadership.

“The low-volatility, high-dividend paying sectors are at risk,” said Wald. Utilities and consumer staples stocks, which both fit that category, were lower on the week.

The market was also awaiting the outcome of the Senate impeachment trial of President Donald Trump, and it is not expected to react.

Monday

Presidents’ Day holiday 

Markets closed

Tuesday

Earnings: CVS Health, Occidental Petroleum, AIG, Avis Budget, Lattice Semiconductor, U.S. Foods, Advance Auto Parts, Vulcan Materials, Palantir, Agilent, La-Z-Boy

8:30 a.m. Empire manufacturing

11:10 a.m. Fed Governor Michelle Bowman

12:30 p.m. Kansas City Fed President Esther George

1:00 p.m. Dallas Fed President Robert Kaplan

4:00 p.m. TIC data 

Wednesday

Earnings: Hilton Worldwide, Synopsys, Pioneer Natural Resources, Cheesecake Factory, Tanger Factory Outlets, Hyatt Hotels, Owens Corning, Baidu, CF Industries, Marathon Oil, Analog Devices

7:00 a.m. Mortgage applications

8:30 a.m. Retail sales

8:30 a.m. PPI

9:15 a.m. Industrial production

10:00 a.m. Boston Fed President Eric Rosengren

10:00 a.m. NAHB survey

2:00 p.m. FOMC minutes

Thursday

Earnings: Walmart, Applied Materials, Cabot Oil and Gas, Barrick Gold, Southern Co, Waste Management, Marriott, Dropbox, Trip Advisor, Consolidated Edison, Credit Suisse, Barclays, Airbus, Daimler

8:00 a.m. Fed Governor Lael Brainard

8:30 a.m. Jobless claims

8:30 a.m. Building permits

8:30 a.m. Housing starts

8:30 a.m. Philadelphia Fed survey

Friday

Earnings: Deere, Eni, Allianz

10:00 a.m. Existing homes sales

11:00 a.m. Boston Fed’s Rosengren