After a holiday-shortened week, investors will be keeping a close eye on the inflation report as a major highlight next week. The labor market showed new signs of easing last week.
Nonfarm payrolls rose by 206,000 in June, down slightly from a revised 218,000 in May. Additionally, the U.S. unemployment rate rose slightly to 4.1% from 4%, above the 4% forecast by the Federal Reserve for this year.
Inflation pressures, a concern for markets and policymakers alike, may also be showing signs of easing: The ISM Price Payments Index, a proxy for inflation for goods and services, fell less than expected to its lowest level since the end of the pandemic.
Additionally, annual wage growth based on nonfarm payrolls came in at 3.9%, down from 4.1% in May and the lowest since the pandemic began.
“In our view, markets should continue to fare well if inflation continues to moderate and the economy softens but does not tip into a downturn or recession. This means the Fed is likely to begin a rate cutting cycle even as the economy grows near trend levels,” Edward Jones strategists said in a note.
“If the economy falters and the Fed has to cut rates to support growth, markets would likely not be able to hold up, but we don’t see any signs of that happening. Keep in mind that the economy and labor market started out exceptionally strong and may now be gradually normalizing.”
Let’s take a look at what’s going to happen in the market over the next week.
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President Biden
President Joe Biden is facing growing skepticism from within his own party about his possible reelection campaign in 2024. Concerns were not alleviated following a recent interview with ABC News that was expected to touch on these issues.
Adding to Democratic anxiety, two U.S. representatives, Mike Quigley of Illinois and Angie Craig of Minnesota, have publicly called on Biden to reconsider his intention to run for president again.
That Quigley and Craig called on Biden to step down is a notable development given their status as members of Biden’s party. Their comments add to larger doubts that are slowly surfacing among Democratic lawmakers, strategists and donors.
Growing dissent within the Democratic Party suggests they are exploring alternative strategies and candidates to improve their chances of victory in the upcoming elections.
“It is unlikely that this uncertainty will persist for more than a few more weeks,” TD Cowen strategists wrote.
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Powell’s speech
Federal Reserve Chairman Jerome Powell is scheduled to testify before the House and Senate on Tuesday and Wednesday, respectively, and while the hearings will be focused primarily on monetary policy, analysts at TD Cowen expect there will also be some questions on a number of regulatory issues.
“We expect a lot of questions about the end of Basel III, long-term liabilities for regional banks and changes to liquidity requirements,” the strategists said.
“We expect Chairman Powell to use these questions to set expectations for the final phase of Basel III capital proposals, regional bank long-term debt proposals, and expected proposals for bank liquidity changes.”
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Consumer Price Index
The June inflation report is due to be released on Thursday, July 11. Market expectations are for an increase of 0.1% month-on-month and 3.1% year-on-year. Core CPI is expected to increase by 0.2%.
Bank of America agrees with the market on both the headline and core numbers, but expects a 3.2% change year-over-year.
“If the CPI report turns out in line with our expectations, we would maintain our expectation that the Fed will begin its rate cutting cycle in December,” Bank of America economists wrote.
“However, we acknowledge that a 0.2% month-on-month increase in core CPI could risk leaning towards an earlier rate cut, given signs of softening economic activity.”
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Second quarter earnings season
As early reports for the second-quarter earnings season begin to come in, there are signs that companies are performing well. Projections for the second quarter of 2024 are calling for an 8.6% increase in profits and a 4.7% increase in revenue compared to the same period last year. This projected growth rate is the most notable since the 9.9% increase observed in the first quarter of 2022.
The trend of positive revisions leading up to this earnings cycle appears to have set the stage for a period of continued corporate resilience and improving financial outlooks.Expected earnings growth for the S&P 500 not only reflects a robust recovery, but also signals a possible shift in market momentum.
As usual, second-quarter earnings season officially kicks off on Friday, with JPMorgan Chase (NYSE:), Wells Fargo and Citigroup scheduled to report results.
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Other economic data
In addition to the highly anticipated CPI report, investors will also be keeping an eye on weekly jobless claims and the U.S. Producer Price Index (PPI) report, both of which are due to be released on Thursday and Friday, respectively.
