It was a volatile week for trading on Wall Street, but stocks ended the week at roughly the same level as last Friday.
Financial markets panicked on Monday as yen carry trades were unwound and volatility spiked after investors quickly began pricing in the growing likelihood of a recession and further easing from the Federal Reserve following the release of July’s jobs data last week.
Markets corrected later in the week as new data on weekly unemployment benefits eased fears that the U.S. economy was heading for a sharp downturn.
Despite starting the week with a big drop, stocks traded roughly sideways over the course of the week, with wild fluctuations. Over the course of the week, the S&P 500 (^GSPC) was little changed, while the Nasdaq Composite Index (^IXIC) was down less than 0.2%. The Dow Jones Industrial Average (^DJI) was down about 0.6%. On Monday alone, both the S&P 500 and Nasdaq were down more than 3%.
Next week, the July Consumer Price Index (CPI) and Retail Sales reports will headline the economic calendar and give investors new fuel for the debate over how quickly and how much the Federal Reserve should cut interest rates. Updates on consumer sentiment, weekly jobless claims and manufacturing production will also be in focus.
On the corporate side, earnings season continues to wind down, but the spotlight remains on the consumer, with reports from Home Depot (HD), Walmart (WMT), and Alibaba (BABA) highlighting an otherwise quiet quarterly earnings week.
Fed bets go haywire
After the July jobs report raised concerns that the Fed had kept interest rates too high for too long, the heated debate on Wall Street shifted from when the Fed should start cutting rates to how much the Fed should cut them.
From talk of a rate cut between emergency meetings to markets pricing in a near 100% chance of a 50 basis point rate cut in September, markets are racing to discern what the central bank’s next move will be.
Read more: How the Federal Reserve’s interest rate decision will affect your bank accounts, CDs, loans and credit cards
As of Friday afternoon, markets were pricing in about a 50% chance that the Fed would cut interest rates by 50 basis points by the end of its September meeting, down from 75% a week ago, according to CME’s FedWatch tool.
Still, some economists argue that pricing is too aggressive.
“The combination of rising unemployment and falling inflation further strengthens an already solid case for Fed easing, with us forecasting a cumulative 200 rate cuts. [basis points] “We expect this trend to intensify over the next year or two,” Goldman Sachs chief economist Jan Hatzius wrote in a client note on Aug. 7.
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“However, we believe the market is pricing in too aggressively in the near term, especially given the possibility of a 50bp cut at the Sept. 17-18 FOMC meeting.”
Inflation is back in the spotlight
The next test for the Fed’s argument will come on Wednesday, when the Consumer Price Index (CPI) for July is released, giving investors an update on inflation.
Wall Street expects headline consumer prices, which include food and energy prices, to rise 3% annually, unchanged from June. Inflation is expected to rise 0.2% month-on-month after declining 0.1% in June.
On a “core” basis, which excludes food and energy prices, inflation is expected to rise 3.2% year-on-year, slowing from June’s 3.3% increase. Monthly core price inflation is expected to rise 0.2% from June’s 0.1% increase.
“The July CPI report will further support the view that inflation is moderating, even if it has not yet fully returned to the Fed’s target,” Sarah House, senior economist at Wells Fargo, said in a client note.
Retail Reading
The latest retail sales data will also be closely watched on Thursday, as investors look for clues about whether the U.S. economy, and importantly, the American consumer, is slowing.
Economists expect retail sales to have grown 0.3% in July from the previous month, and 0.2% excluding gasoline and autos, slowing from June’s 0.8% increase.
Bank of America’s head of economics, Michael Gapen, stressed in a client note last week that the weak retail sales numbers “may not excite a market still mindful of downside risks,” but given the strong increase in retail sales in June, the weak numbers “should keep spending on track for a relatively strong quarter.”
“Overall, the data [retail sales and inflation] “If the results turn out as expected, we expect markets to price in fewer rate cuts this year, reducing the likelihood of a big cut in September,” Gapen wrote.
Stocks will want “good” economic news
Revenues for S&P 500 companies grew 10.8% year over year, which would be the highest annual growth rate since the fourth quarter of 2021, according to the latest data from John Butters, senior earnings analyst at FactSet.
But as Citi U.S. equity strategist Scott Kronert wrote in a client note this week, “earnings have somewhat lagged macro-driven price movements over the past two weeks.”
That was reflected in stocks’ biggest one-day gain since 2022 last week, climbing 2.3% as the release of typically benign weekly jobless benefits data eased concerns about the economy.
Such a sharp rally following a report like the jobless claims numbers “speaks more to the fragile state of the stock market and anxiety about the economic data than anything else,” DataTrek co-founder Nicholas Colas wrote in a note Friday morning.
This will put special focus on the deluge of data coming next week.
And if next week’s data leads the market to price in a tapering of the Fed’s rate cuts and bond yields rise, this could be a positive catalyst for stocks as we move into a market environment where bad news is bad news and good news is good news.
“Not only will the good news be good, but I think the good news will actually be very good and the bad news will be very bad,” Michael Kantrowitz, chief investment strategist at Piper Sandler, said in a client video on Friday.
“There will be many good days and bad days this year, and markets will be much more volatile than in the past.”
Weekly Calendar
Monday
Economic Data: New York Fed 1-year inflation expectations, July (previously 3.02%)
Earnings: Rumble (RUM)
Tuesday
Economic Data: NFIB Small Business Optimism, July (Expected 91.7, Previous 91.5); Producer Price Index, Month-on-Month, July (Expected +0.2%, Previous +0.2%); Producer Price Index, Year-on-Year, July (Expected +2.3%, Previous +2.6%)
Revenues: Home Depot (HD), On Holdings (ONON)
Wednesday
Economic Data: Consumer Price Index, m/m, July (Expected +0.2%, previous -0.1%); Core CPI, m/m, July (Expected +0.2%, previous +0.1%); CPI, y/y, July (Expected +3%, previous +3%); Core CPI, y/y, July (Expected +3.2%, previous +3.3%); Real Average Hourly Earnings, y/y, July (previous +0.8%); MBA Mortgage Applications, week ending August 9 (+6.9%)
Revenues: Brinker International (EAT), Canoe (GOEV), Cisco (CSCO), Dole (DOLE), UBS (UBS)
Thursday
Economic Data: Initial jobless claims for week ending August 10 (236K expected, 233K); Retail sales July m/m (+0.3% expected, +0%); Retail sales ex-autos & gasoline July (+0.2% expected, +0.8%); Import prices July m/m (-0.1% expected, +0.0%); Export prices July m/m (+0.7%); Industrial production July m/m (-0.2% expected, +0.6%); NAHB Housing Index August (42 expected); Empire Manufacturing Index August (-6 expected, -6.6%)
Revenues: Applied Materials (AMAT), Alibaba (BABA), JD.Com (JD), Deere & Company (DE), H&R Block (HRB)
Friday
Economic data: University of Michigan Consumer Sentiment Index, August flash (66.1 expected, 66.4), July Building Permits m/m (-0.9% expected, +3.4% previous), July Housing Starts m/m (-0.2% expected, +3% previous)
Revenue: No notable revenue.
Josh Shaffer is a reporter for Yahoo Finance. Follow him on X Follow.
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