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Stimulus prospects could boost the stock market and interest rates in the week ahead

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

Angela Weiss | AFP | Getty Images

The prospects of a big government spending program could continue to boost the stock market and put upward pressure on interest rates in the week ahead.

Earnings season is beginning to wind down, but some big names have yet to report.

Walmart’s earnings on Thursday should provide a good window into the consumer, as should the government’s retail sales report for January, also expected Wednesday.

The Federal Reserve on Wednesday afternoon releases minutes from its last meeting, and investors will dig into those for any insight into the central bank’s view on inflation.

Two dominant themes amid stimulus prospects

Inflation and rising interest rates have been two dominant themes for investors recently and have become increasingly so as the market has upgraded its view of how much fiscal coronavirus stimulus could be signed into law.

“The market is waiting to see how big the package is going to be. It’s going to be important. They can get it through reconciliation,” said Quincy Krosby, chief market strategist at Prudential Financial.

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

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

“There is less pushback to President Biden’s proposed stimulus from moderate Democrats than we expected, so a price tag of around $1.5 trillion seems likely, which is higher than we initially thought,” noted Cornerstone Macro policy analysts.

They say they expect a bill to come to the floor during the week of Feb. 22, and that it could become law by the first week of March. Investors will stay focused on its progress through Congress.

Market pros expect the bigger the spending package, the larger the pop will be in economic growth in the near term. That has helped send Treasury yields, which move opposite price, to higher levels.

It has also increased concerns about inflation.

Inflation and rising yields

Housing statistics

Housing data is also dominant on the calendar in the holiday-shortened week.

The National Association of Home Builders releases its housing market index data on Wednesday, a measurement of sentiment around market conditions for new home sales.

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

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Week ahead calendar