Trade talks closing in on finish line as markets weigh inflation data, earnings in week ahead

A trader works ahead of the closing bell on the floor of the New York Stock Exchange (NYSE) on April 12, 2019 in New York City.

Johannes Eisele | AFP | Getty Images

A trade agreement between the U.S. and China could be a strong catalyst for stocks, even though analysts say the market may have already priced in much of the gains.

Chinese Vice Premier Liu He will travel to Washington for talks in the coming week, and sources have told CNBC a deal is possible by Friday. Trade has been one of the biggest overhangs for the market, but the prospect of successful talks has helped fuel the S&P 500's 17% gain this year.

Besides trade in the coming week, investors are awaiting Friday's inflation data, important after Federal Reserve Chairman Jerome Powell's comment Wednesday that weak inflation is transitory, signaling the Fed does not now have to consider an interest rate cut.

That comment from the Fed chief sent markets reeling, since many investors have been positioning in both bonds and stocks for a pre-emptive interest rate cut from the Fed. So Friday's consumer price index will be key, even though unlike the inflation measure the Fed watches, CPI is expected to show inflation running slightly above the Fed's 2% target in April. The Fed's favored PCE deflator had core inflation at 1.6% in the first quarter.

To close out this week, the April jobs report crushed Wall Street's expectations — adding a robust 263,000 new hires while the unemployment rate fell to 3.6%, the lowest level in a generation, the Labor Department said Friday. Wall Street had been expecting 190,000 hires and a 3.8% jobless rate.

"The more robust the incoming data is, the more time the Fed has to sit and watch and evaluate whether inflation is rising this year in the manner that they think it is. If the labor market is good enough, it allows the Fed to be patient, and let this thing play out," said Michael Gapen, chief U.S. economist at Barclays. Gapen said if the data and inflation is instead weakening, the Fed would have to rethink its position later in the year.

Disney earnings

Earnings will continue to be a factor in the week ahead, with about 50 S&P 500 companies reporting, including media names like Disney, News Corp and Viacom.

But if the trade negotiations are resolved, that will be the event that could have ramifications for markets and the economy for months to come.

But the reaction in the stock market may initially seem short-lived. "If the tariffs come off, you might get some readjustment to earnings expectations. So, you might have a nice couple of days, but I think it's three-quarters of the way priced in, maybe a little bit more," said Lori Calvasina, chief U.S. equities strategist at RBC.

She said some sectors have already benefited from the prospects of a deal. "The two I think are in focus are industrials and semis," she said. As for semiconductors, "there's been such a fierce rally in that space this year. Semis were sort of the pure play on the China fears and they rallied hard and fast. They're starting to see some profit-taking."

The VanEck Vectors Semiconductor ETF is up 33.4% year-to-date.

Calvasina said the better-than-expected performance in S&P 500 first quarter earnings shows there will not be the earnings recession expected just a month ago. She said companies focused a lot on cost cutting to maintain their margins. According to Refinitiv, the S&P 500 companies are now expected to see profit growth of about 0.7%, compared to expectations for a contraction of 2% back on April 1.

"I think the market very much deserves the rally we've had," she said. However, she sees limited upside and maintains a target of 2,950 on the S&P for year end. "We're getting to the part of the year where we're vulnerable to bad news. It doesn't mean today is the top, but when we think about where we're going to be at year end, it's a good reason not to raise the target. We feel like we can overshoot in in the short term."

"It's probably a good time to take money off the table. We've said that things could weigh on the market in the second half," she said.

Investors are also looking towards Omaha this weekend. Berkshire Hathaway was holding its annual meeting this Saturday, and that could generate plenty of headlines for investors who are Warren Buffett watchers. The investor already revealed to CNBC Thursday that his company was a buyer of Amazon.

What to watch

Monday

Earnings: Occidental Petroleum, Sysco, Tyson Foods, Bausch Health, AIG, Pioneer Natural Resources, Hertz Global, Liberty Global, KLA-Tencor, Bloom Energy, Assurant, Everest Re, Iamgold

6:00 a.m. Chicago Fed President Charles Evans

9:30 a.m. Philadelphia Fed Patrick Harker

2:00 p.m. Senior loan officer survey

Tuesday

Earnings: A-B Inbev, Electronic Arts, TripAdvisor, Petrobras, Diamondback Energy, Mylan, SeaWorld, Allergan, Lyft, Ambev, Emerson, Regeneron, Cinemark, Plains All American, Papa John's, Sempra Energy, Match Group, Wingstop

10:00 a.m. JOLTs

3:00 p.m. Consumer credit

Wednesday

Earnings: Disney, Fox Corp, Madison Square Garden, Wendy's, Hostess Brands, Marathon Petroleum, Royal Ahold, Barrick Gold, Bunge, Acushnet, McKesson, Switch, IAC/Interactive, Honda Motor, Toyota Motors, Siemens

Thursday

Earnings: News Corp, Booking Holdings, Keurig Dr. Pepper, Tapestry, Norwegian Crusie Line, Becton Dickinson, Duke Energy, CenterPoint, Canadian Natural Resources, Cardinal Health, ArcelorMittal, Azul, Hain Celestial, AMC Enertainment, TrueCar, Axa Equitable, Vale, Equifax, Zillow, Yelp

8:30 a.m. International trade

8:30 a.m. Jobless claims

8:30 a.m. PPI

10:00 a.m. Wholesale trade

10:45 a.m. Atlanta Fed President Raphael Bostic

1:15 a.m. Chicago Fed's Evans

Friday

Earnings: Viacom, Marriott, Tribune Media, Telefonica, Buckeye Partners, JD.com

8:30 a.m. CPI

9:00 a.m. Atlanta Fed's Bostic

10:00 a.m. New York Fed President John Williams

2:00 p.m. Federal budget

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