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The financial outlook might enhance the inventory market and rates of interest within the coming week

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New York Stock Exchange (NYSE) on Wall Street on January 12, 2021 in New York City.

Angela Weiss | AFP | Getty Images

The prospect of a major government spending program could further boost the stock market and put interest rates under pressure in the coming week.

The earnings season is drawing to a close, but some big names have yet to report.

Walmart's earnings on Thursday should provide a good look at the consumer, as should the government's January retail sales report, also expected on Wednesday.

The Federal Reserve is releasing minutes of its last meeting on Wednesday afternoon, and investors will be studying these for some insight into the central bank's view of inflation.

Two dominant themes amidst the economic outlook

Inflation and rising interest rates have been two dominant topics for investors lately and have become increasingly important as the market improved its view of how much fiscal coronavirus incentive could be included in the law.

"The market is waiting to see how big the package will be. It will be important. You can achieve it through reconciliation," said Quincy Krosby, chief marketing strategist at Prudential Financial.

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

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

"President Biden's proposed moderate Democratic incentive is being pushed back less than expected, making a price of around $ 1.5 trillion likely, which is higher than originally thought," said Cornerstone Macro analysts.

They say they expect a bill to be put to the vote the week of February 22nd and that it could become law the first week of March. Investors will continue to focus on their progress through Congress.

Market professionals expect that economic growth will be greater in the near future, the larger the spending package. This has helped the government bond yields, which are moving against price, soar to higher levels.

It has also raised concerns about inflation.

Inflation and rising returns

Last week, the 10-year return – a key benchmark – was 1.2% for the first time since March. It hit this level briefly early in the week but returned to it in the last hour of trading on Friday.

Returns rise on optimism about an improving economy, but also when inflation expectations rise too.

"When you think of the big drivers, they are related – vaccines, stimulus and inflation," said Michael Schumacher, director of interest rate strategy at Wells Fargo Securities. "If there is more talk from D.C. about driving the stimulus package, the conditions are in place for returns to rise."

The market is concerned that the economy is getting hotter as it could trigger a change in Fed policy.

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

Prudential Financial's Krosby said the market will also be watching the producer price index on Wednesday, although it's usually not a big factor.

"Because there is such a debate about inflation trends, I know the CPI (consumer price index) has been comfortable, but the producer price index is coming in and we'll see if that has eased," she said.

"Obviously, supply chains are being restored and inventories are being built up," said Krosby.

Consumer inflation reached an annual rate of 1.4% in January.

Housing statistics

In the week with shortened public holidays, the apartment dates also dominate the calendar.

The National Association of Home Builders released its real estate market index data on Wednesday, a measure of sentiment regarding market conditions for new home sales.

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

Upcoming hearing on GameStop and short bruises

Stocks were higher for the past week, with energy, technology and finance performing the best. The S&P 500 rose 1.2% to end the week at 3,934.

There have been some market hotspots like cannabis stocks that have become the Reddit trading community's newest target. Shares shot higher on Wednesday, adding to the already strong gains of the past few weeks before some of those advances were abandoned.

Investors will also focus on Thursday's hearing before the House Financial Services Committee on the wild trading of GameStop and other heavily shortened names.

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

The frenzied activity in some small and short positions has raised concerns about the market overheating. However, Ari Wald, head of technical analysis at Oppenheimer, said the broader market's progress was intact.

"Overall, it's a bull market. I think the persistence of progress is underestimated," said Wald. He said the market techniques are sound. The breadth is broad and there is a cyclical leadership.

"The sectors with low volatility and high dividend payouts are at risk," said Wald. Utilities and consumer staples, both of which fit this category, were lower over the week.

The market has also been waiting for the result of the impeachment trial of former President Donald Trump in the Senate and is not expected to react.

Calendar for the week ahead

Monday

Presidents Day holiday

Markets closed

Tuesday

Merits: CVS Health, Occidental Petroleum, AIG, Avis Budget, Lattice Semiconductors, US Food, Advance Auto Parts, Volcanic Materials, Palantir, Agilent, La-Z-Boy

8:30 a.m. Empire production

11:10 a.m. Fed Governor Michelle Bowman

12:30 pm. Esther George, Kansas City Fed President

1:00 pm. Robert Kaplan, President of the Dallas Fed

4:00 p.m. TIC data

Wednesday

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

7:00 am mortgage applications

8:30 a.m. retail sale

8:30 a.m. PPI

9:15 a.m. industrial production

10:00 am Eric Fedgren, President of the Boston Fed

10:00 am NAHB survey

2 p.m. FOMC minutes

Thursday

Merits: Walmart, Applied Materials, Cabot Oil & 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. unemployment claims

8:30 a.m. building permits

8:30 a.m. Housing construction begins

8:30 a.m. Philadelphia Fed poll

Friday

Merits: Deere, Eni, Alliance

10:00 am Sale of existing properties

11:00 am Rosengren from the Boston Fed

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Katherine Clark