Editor’s Note: On Monday, February 19, the stock market will be closed for the Presidents Day holiday. The InvestorPlace offices and customer service department will also be closed on Monday. I hope you enjoy the long weekend!

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As we enter the home stretch of this earnings announcement season, I want to take a moment to reflect on just how stunning it has been.

According to FactSet, 79% of S&P 500 companies have now announced quarterly results, and 75% of these companies exceeded analysts’ earnings expectations. The S&P 500 is now anticipated to achieve fourth-quarter earnings growth of 3.2%, up from 2.9% last week and previous expectations for a 1.4% decline in the final week of January.

These positive results have continued to drive all of the major indices higher, with the S&P 500 breaking through 5,000 for the first time ever last Friday.

However, earnings season took a back seat this week as investors shifted their attention to the latest inflation reports and January U.S. sales results.

All three of these reports are critical factors in the Federal Reserve’s decision-making process on when to begin cutting rates. So, in today’s Market 360, let’s make sense of the latest economic data reports. I’ll also share when I think the Fed will cut rates and how to position your portfolio while Wall Street waits for answers.

Digging Deeper into the Latest Economic Data

Consumer Price Index (CPI)

The Consumer Price Index (CPI) reading for January was released first thing Tuesday morning – and the data showed that inflation continues to cool, though not as quickly as economists had hoped. Headline CPI rose 0.3% in January and was up 3.1% in the past 12 months. That was higher than economists’ expectations for headline CPI to rise 0.2% month-over-month and for a 2.9% annual pace. However, it’s still down from December’s 3.4% annual pace.

Core CPI, which excludes food and energy, increased 0.4% in January and was up 3.9% in the past 12 months. This was also a little hotter than forecasts for a 3.7% annual pace and a 0.3% month-to-month rate. The annual pace of core inflation remained in line with December’s 3.9%.

Taking a closer look at the details…

• The food index increased 0.4% (“food at home” was up 0.4%, while “food away from home” rose 0.5%).
• The energy index fell 0.9% over the month thanks largely to a decline in gasoline prices.
• The index for used cars and trucks and the index for apparel both fell over the month.

But the big bugaboo with the CPI continues to be Owners’ Equivalent Rent (OER), which accounts for two-thirds of the CPI. OER rose 0.6% in January, which compares to the previous two months’ rise of 0.4%, and is now up 6% in the last 12 months. So, unfortunately, high shelter costs are still pushing the CPI higher.

While both headline and core CPI came in slightly above expectations, this was still a positive CPI report. However, the markets weren’t happy with the numbers, causing a sharp selloff in the market: The S&P 500 and Dow ended the day 1.4% lower, while the NASDAQ fell 1.8%.

U.S. January Retail Sales

The January retail sales report was released on Tuesday – and it was weak across the board.

The Commerce Department announced that retail sales fell 0.8% in January, which was substantially lower than economists’ expectation for a 0.2% decline. This month-over-month decline marks the largest fall since March 2023.

Out of the 13 categories noted in the report, nine saw decreases from a month ago. Digging a little deeper into the details…

• Leading the decline was building materials, falling 4.1%.
• Sales at miscellaneous stores dropped 3%.
• Gas station sales fell 1.7%.
• Sales at furniture and home stores rose 1.5% and spending at bars and restaurants increased 0.7%.

Overall, this report was just really disappointing. I should also add that the Commerce Department revised the December retail sales numbers from a 0.6% gain to a 0.4% gain.

Clearly, consumers spent too much during the holidays.

While this was a disastrous report, I don’t want you to let these results bother you. It is important to note that this is only the second retail sales decline in the past 10 months. But either way, this disastrous report is just going to make the Fed consider cutting rates sooner rather than later.

Producer Price Index (PPI)

This morning, the Labor Department reported a rather disappointing Producer Price Index (PPI) for January that was higher than economists’ expectations.

Now, the PPI is important because it measures the price of goods at the wholesale level. The PPI tells us what producers are paying for goods and services before they reach consumers. It’s considered a good leading indicator of inflation, so the markets were keen to get the report.

So, let’s dig into the numbers…

• PPI rose 0.3% in January and 0.9% in the past 12 months.
• Core PPI, excluding food, energy and trade margins, surged 0.6% in January and rose 2.6% in the past 12 months.
• Excludes food and energy, PPI rose 0.3% in January.
• Wholesale food and energy prices decreased 0.3% and 1.7%, respectively, in January.

The real problem with the wholesale inflation continues to be wholesale service costs, which rose 0.6% in January and is the largest monthly increase in the past 12 months (since January 2023). But the bright spot remains wholesale goods costs, which declined 0.2% in January and was the fourth straight monthly decline.

While this report came in hotter than expected, I do want you to know next month it should fall quite a bit because we’re cutting off a big increase from a year ago.  What’s also clear is that the U.S. continues to import deflation from China.

China’s National Bureau of Statistics announced that consumer prices declined -0.8% in January, which is the biggest monthly drop since September 2009. Furthermore, wholesale prices based on the Chinese producer price index, plunged -2.5% in January.

And since the U.S. is importing this deflation from China, the Fed has to be careful because global deflation is spreading.

Reading Between the Lines

So, the big question for the market is: Will the Federal Reserve cut key interest rates on May 1 or June?

Based on the data from this week, I would say that June is more likely, but it is really dependent on market rates. Currently, the 10-year Treasury yield stands at about 4.29%, well below the federal funds rate of 5.25% – 5.50%. So, the Fed is still out of sync with market rates.

I should also add that Bloomberg reported this week that many economists are starting to think that the Fed is keeping monetary policy too tight. This is based on a poll from the National Association of Business Economics where 21% of the respondents believe that the Fed’s current monetary stance is “too restrictive,” the highest dissatisfaction since 2011.

Personally, I would like to see them cut sooner than June. According to the Fed’s preferred indicator, the Personal Consumption Expenditures (PCE) index, inflation is already within its target range over the last seven months. As each month passes, they’re cutting off a higher number and tacking on a lower number. So, they’re going to be at the Fed’s 2% annual target rate in June.

Until we get