After a volatile trading week on Wall Street, the stock market ended the week virtually where it left off last Friday.
Panic broke out in financial markets on Monday as the unwinding of the yen carry trade increased volatility after investors quickly priced in a higher likelihood of a recession and further easing of monetary policy by the U.S. Federal Reserve following the July employment report released last week.
Towards the end of the week, markets corrected as new data on weekly jobless claims calmed fears that the US economy was rapidly heading for a downward spiral.
Price volatility left stocks almost unchanged this week, although they were significantly lower on Monday. This week, the S&P 500 (^GSPC) was almost unchanged, while the Nasdaq Composite (^IXIC) fell less than 0.2%. The Dow Jones Industrial Average (^DJI) fell about 0.6%. On Monday alone, both the S&P 500 and the Nasdaq fell more than 3%.
The coming week will give investors new fodder for the debate over how quickly and deeply the Federal Reserve should cut interest rates. The consumer price index (CPI) for July and retail sales will be the main economic topics. The latest news on consumer sentiment, weekly unemployment reports and manufacturing output will also be in focus.
On the corporate side, earnings season is coming to a close, but the focus will remain on the consumer, with reports from Home Depot (HD), Walmart (WMT) and Alibaba (BABA) dominating the headlines of an otherwise quiet week for quarterly earnings.
Betting on the Fed is in full swing
After the July employment report heightened concerns that the Fed may have 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 central bank should cut rates.
From talk of an extraordinary rate cut between meetings to the market pricing in a 100% probability of a 50 basis point rate cut in September, markets are on a wild rollercoaster trying to assess what the central bank’s next likely move will be.
Read more: What the Fed’s interest rate decision means for bank accounts, CDs, loans and credit cards
According to the CME’s FedWatch tool, markets on Friday afternoon were expecting a probability of about 50 percent that the Federal Reserve would cut interest rates by 50 basis points by the end of its September meeting. The week before, the probability was 75 percent, according to CME.
However, some economists argue that pricing is too aggressive.
“The combination of higher unemployment and lower inflation has further strengthened the already solid case for Fed easing, and we expect cumulative cuts of 200 (basis points) over the next one to two years,” Jan Hatzius, chief economist at Goldman Sachs, wrote in a note to clients on August 7.
“However, we believe market pricing is too aggressive in the near term, particularly given the likelihood of a 50 basis point cut at the FOMC meeting on September 17-18.”
Inflation back in focus
The next test for the Fed debate comes on Wednesday, when the release of the July Consumer Price Index (CPI) will give investors an updated insight into inflation.
Wall Street expects consumer prices, including food and energy, 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 have risen by 3.2% year-on-year, slowing from the 3.3% increase in June. Monthly core price increases are expected to have risen by 0.2%, compared with 0.1% in June.
“The July consumer price index report will likely reinforce the notion that inflation is moderating, even if it is not quite back to the Fed’s target,” Sarah House, chief economist at Wells Fargo, wrote in a note to clients.
A reading on the topic of retail
New retail sales data will also be closely watched on Thursday as investors look for clues as to whether growth in the U.S. economy – and especially the U.S. consumer – is slowing.
Economists expect retail sales to rise 0.3 percent in July from the previous month. Excluding gasoline and autos, the increase is expected to be 0.2 percent, which would slow from June’s 0.8 percent sales growth.
Michael Gapen, head of economics at Bank of America, stressed in a note to clients last week that weak retail sales “are unlikely to excite markets as they are aware of downside risks.” However, given the sharp rise in retail sales in June, even a weaker reading ensures that “spending is on track for a reasonably strong quarter.”
“If the data (retail sales and inflation) come in as expected, we expect the market to price in fewer cuts this year and reduce the likelihood of a big cut in September,” Gapen wrote.
Stock markets want “good” economic news
The latest data from John Butters, senior earnings analyst at FactSet, shows that S&P 500 companies are on pace for year-over-year earnings growth of 10.8%, the highest annual growth rate since the fourth quarter of 2021.
However, Scott Chronert, U.S. equity strategist at Citi, wrote in a note to clients this week: “Over the past two weeks, corporate earnings have taken a back seat to macroeconomic price developments.”
One example of this was the stock price, which last week posted its best one-day gain since 2022, rising 2.3%, as the release of the usually mild weekly jobless claims data helped ease economic worries.
Nicholas Colas, co-founder of DataTrek, wrote in a note Friday morning that a price increase of this magnitude following a report like initial jobless claims “says more about the fragile state of the stock market and nervousness about economic data than anything else.”
This puts the flood of data in the coming week into particular focus.
And if markets price in fewer Fed rate cuts after next week’s data and bond yields rise, that could be a positive catalyst for stock prices as the market moves into an environment where bad news is bad news and good news is good news.
“Not only will good news be good, I think good news will be very good, and bad news will be very bad,” Michael Kantrowitz, chief investment strategist at Piper Sandler, told clients in a video on Friday.
“We will have many good days and many bad days and market volatility will be much higher than in most months this year.”
Weekly calendar
Monday
Economic data: New York Fed one-year inflation expectations, July (previously 3.02%)
Revenue: Rumble (RUM)
Tuesday
Economic data: NFIB Small Business Optimism, July (91.7 expected, previously 91.5); Producer Price Index, m/m, July (+0.2% expected, previously +0.2%); PPI, year over year, July (+2.3% expected, previously 2.6%)
Revenue: Home Depot (HD), On Holdings (ONON)
Wednesday
Economic data: Consumer Price Index, month-on-month, July (+0.2% expected, -0.1% prior); Core CPI, month-on-month, July (+0.2% expected, +0.1% prior); CPI, year-on-year, July (+3% expected, +3% prior); Core CPI, year-on-year, July (+3.2% expected, +3.3% prior); Real Average Hourly Earnings, year-on-year, July (+0.8% prior); Mortgage Applications for MBA Degrees, Week Ending August 9 (+6.9%)
Revenue: Brinker International (EAT), Canoo (GOEV), Cisco (CSCO), Dole (DOLE), UBS (UBS)
Thursday
Economic data: Initial jobless claims, week ending Aug. 10 (236K expected, 233K prior); Retail sales, month-over-month, July (+0.3% expected, +0% prior); Retail sales excluding autos and gasoline, July (+0.2% expected, +0.8% prior); Import prices, month-over-month, July (-0.1% expected, +0.0% prior); Export prices, month-over-month, July (+0.7% prior); Industrial production, month-over-month, July (-0.2% expected, +0.6% prior); NAHB Housing Market Index, August (42 prior); Empire Manufacturing, August (-6 expected, -6.6 prior);
Revenue: Applied Materials (AMAT), Alibaba (BABA), JD.Com (JD), Deere & Company (DE), H&R Block (HRB)
Friday
Economic data: University of Michigan consumer sentiment, preliminary, August (66.1 expected, previously 66.4); building permits month over month, July (-0.9% expected, previously +3.4%); housing starts month over month, July (-0.2% expected, previously +3%)
Revenue: No significant income.
Josh Schafer is a reporter at Yahoo Finance. Follow him on X @_joshschafer.
Click here for a detailed analysis of the latest stock market news and events that move stock prices
Read the latest financial and business news from Yahoo Finance
