US equity investors will be closely monitoring the Federal Reserve's preferred inflation data this week, looking for a sustained disinflationary trend while observing a broadening market rally and escalating tensions in the Middle East. Recent indicators suggest a rise in the headline personal consumption and expenditures (PCE) index of 0.1% month-over-month, along with an increase of 0.2% in the core rate for August.
This growth indicates a year-over-year rate of 2.2% in the headline index compared to 2.5% in July, marking the lowest level since February 2021. Analysts at Daiwa Capital expect the Fed's favored core PCE deflator to behave more consistently than the core Consumer Price Index (CPI), projecting a modest increase of 0.2% month-over-month.
However, they foresee a slight uptick on the annual rate to 2.7%, attributed to a base effect. The inflation data is slated for release on Friday, following Fed Chair Jerome Powell's scheduled speech on Thursday. Excluding transportation, durable goods orders for August are anticipated to remain "extremely subdued," maintaining a generally sideways trend, according to the Daiwa report.
Flash Purchasing Managers' Indices (PMIs), the Conference Board consumer confidence indexes, and the final University of Michigan consumer sentiment index will further illuminate the state of the economy. In the previous week, communication services, energy, and financials outperformed, surpassing the technology sector.
Investors seek continuity in the ongoing rally, particularly among value-oriented peer groups and small capitalization stocks. Tensions in the Middle East have escalated, with Israel's military conducting widespread strikes in Lebanon, reportedly the most extensive since the onset of the Gaza conflict.
This escalation follows intense exchanges of fire between Tel Aviv and Hezbollah over the weekend, as reported by CNN. Early on Monday, West Texas Intermediate oil futures rose by 0.2% to $71.09, while the US Dollar Index increased by 0.3% to 101.07. Additionally, the US 10-year Treasury yield climbed 1.3 basis points to 3.74%. The CBOE Volatility Index showed a 2.5% advance, reaching 16.55 ahead of the market open. This week, key earnings reports are expected from several notable companies, including Micron Technology, Costco, Accenture, and AutoZone..