Dow Jones edges higher as inflation data looms

What’s driving markets

The S&P 500 has jumped 7.2% over the two weeks that ended on Friday, helped by benchmark borrowing costs
BX:TMUBMUSD10Y
falling swiftly from 16-year highs on hopes that inflation can ease further and that the Federal Reserve is finished with its campaign of interest-rate increases.

However, after that strong rally, a more cautious tone prevailed at the start of the new week as investors await the U.S. consumer-price-index report for October, due on Tuesday, which has the ability to underpin the latest bull run or bring it to a halt. Seven- through 30-year Treasury yields were back on the rise, with the rate on the 10-year note up less than 1 basis point at 4.634%.

Read: Stock-market rally faces make-or-break moment. How to play U.S. October inflation data.

Economists expect core CPI growth — a measurement that strips out volatile items such as food and energy — to remain steady at 0.3% month over month, although Wall Street sees the chance of a higher-than-expected annual core rate of 4.2%.

See: This week’s October inflation data looms large on Washington’s economic radar

The producer-price report for October will be published on Wednesday. October retail-sales data is also on the docket this week and will offer further clues to the health of the consumer on Wednesday.

“We obviously have a big inflation data print tomorrow and think markets will generally get what they’re looking for, which is a slow decline in headline inflation,” said John Luke Tyner, a portfolio manager at Alabama-based Aptus Capital Advisors, which manages about $5 billion. “But there’s still a tug of war playing out, with markets getting ahead of the Fed and betting on inflation coming down faster than expected and on rate cuts occurring sooner rather than later.”

Meanwhile, worries over a dysfunctional government contributed to Moody’s Investors Service late Friday cutting its outlook on the U.S. sovereign credit rating to negative from stable.

While the decision by Moody’s is “important,” the possibility of a partial shutdown of the federal government this week is what’s leading to a “more jittery feel” in markets, Tyner said via phone on Monday.

Analysts see a 40% chance of a government shutdown occurring.

Also see: House Republicans look to pass two-step package to avoid partial government shutdown

“We don’t see the decision by Moody’s as having a large and immediate impact on the view the global investment markets hold for U.S. Treasurys,” said Brent Schutte, chief investment officer at Milwaukee-based Northwestern Mutual Wealth Management. “However, it’s important to remember that the country’s annual interest costs on servicing its debt are rising.”

With interest payments taking up more resources in the budget, “it is likely borrowing costs will become an issue that restricts future government spending,” Schutte wrote in weekly commentary distributed on Monday. “This could mean that we may see an erosion of the ultra favorable backdrop for risk-taking that has existed over much of the prior decade.”

Investors will also be keeping an eye out for a slew of reports from retailers, including Home Depot Inc.
HD,
-1.33%
on Tuesday, Target Corp.
TGT,
-0.89%
on Wednesday and Walmart Inc.
WMT,
+0.79%
on Thursday, as third-quarter earnings season comes to an end. Their comments on the health of the consumer may also play into thinking about the Fed.

Earnings Watch: Retail earnings begin this week. ‘It’s getting worse,’ an analyst says.

Through Friday, 92% of S&P 500 companies had reported third-quarter results, according to FactSet. Of those that reported, 81% saw a positive surprise on earnings, while 61% reported a positive surprise on revenue. The year-over-year growth rate for the S&P 500 in the third quarter was on track to come in at 4.1%, according to FactSet, which if realized would mark the first quarter of positive year-over-year growth since the third quarter of last year.

The U.S. budget deficit narrowed in October, data showed on Monday.

Companies in focus

• Shares of Dow component Boeing Co.
  BA,
  +4.51%
  rose 4.4% after a flurry of news. Bloomberg reported Monday that the Chinese government is close to lifting a freeze on commercial sales of the U.S. company’s 737 Max aircraft. Elsewhere, long-haul carrier Emirates announced at the Dubai Airshow that it would buy $52 billion of the Boeing planes, and SunExpress, a joint venture between Turkish Airlines and Lufthansa 
  LHA,
  +1.83%,
  said it would purchase 90 of the 737 Max jets.

• Shares of Nvidia Corp.
  NVDA,
  +1.23%
  advanced 1.2% and are on track for their longest winning streak in almost seven years after the company introduced its new artificial-intelligence chip.

• Collective Audience Inc. shares
  CAUD,
  +3.37%
  surged 11.8% after the digital-marketing company suffered a series of sharp declines in the wake of its blank-check company merger.

Jamie Chisholm contributed.