Traders on the NYSE floor, June 29, 2022.
Source: New York SE
Consumer inflation data and the start of the second quarter earnings season could be two catalysts that will give markets a bumpy ride in the coming week.
Results from PepsiCo are the first major report of the week on Tuesday and Delta Air Lines on Wednesday. JPMorgan Chase and Morgan Stanley open reporting season for banks on Thursday, followed by Wells Fargo, Citigroup and PNC Financial among others on Friday.
A slew of inflation reports could impact markets as they help set the tone for how aggressive the Federal Reserve must be in its fight to calm inflation.
The June CPI is trading high on Wednesday and economists expect it could get hotter on a yearly basis than May’s 8.6%. It’s also the report that could move the markets the most.
“The headline is expected to be higher. That’s largely because of the energy,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. He added that core inflation excluding food and energy could be lower. West Texas Intermediate crude oil futures traded as high as $122 a barrel in June but have since fallen back in July to trade at around $104 a barrel on Friday.
“The question is to what extent moderation in commodity prices will be offset by persistently rising service prices, which are mainly driven by rent,” Boockvar said. “Government statistics still have a lot of catching up to do when it comes to rent.”
Also on Thursday is June’s PPI, and investors are keeping an eye on the University of Michigan’s Friday July consumer sentiment report. This report contains consumer expectations about future inflation, a key metric tracked by the Federal Reserve. June retail sales, another consumer measure, will also be released on Friday.
“PPI is the seed for CPI… and could hit another 10%,” Boockvar said.
The new inflation data follows Friday’s strong jobs report. In June, the economy created 372,000 jobs, about 120,000 more than expected. Strategists say the report has boosted expectations that the Federal Reserve will hike rates by another 75 basis points later this month. A basis point is one hundredth of a percentage point.
“It was enough to continue on the path we had taken. It’s not until we see unemployment rising monthly that I think the Fed will start to buckle,” Boockvar said.
A key question for markets is when inflation will peak, as it has been rising for much longer than the Fed originally expected.
“I think one risk to markets is that inflation may not have peaked yet,” said Michael Arone, chief investment strategist at State Street Global Advisors. “I still think markets are at least hopeful, if not expecting, that inflation will slow.”
As investors watch the pace of inflation, the second quarter earnings season begins. Corporate earnings could be the source of some market turmoil if analysts are forced to trim estimates for the remainder of the year, as many expect.
“The street hasn’t really changed the estimates. Sales growth has fallen. Margins are declining. Analysts are leaving their estimates unchanged,” said Boockvar. “If there is to be a readjustment, this is the right time.”
According to Refinitiv I/B/E/S data, earnings for the S&P 500 are expected to rise 5.7% in the second quarter. Estimates for the third and fourth quarters have moved down slightly but are still at 10.9% and 10.5%, respectively.
“I think the market is gearing up for a challenging earnings quarter, so it’s unclear how much this will add to volatility,” Arone said. He said the companies would keep hitting, but maybe not as hard. “I think they’re going to lower their guidance. Why not? It just makes it easier to walk down the road. I think earnings season is going to be a disappointment. It will be interesting to see how the market reacts.”
Stocks have been higher for the past week, with the S&P 500 gaining 2.3% on Friday afternoon and the Nasdaq gaining 4.3%. Shares were initially lower following the June jobs report but reversed course and rallied on Friday.
The main worst performing sectors for the week were Utilities and Energy. S&P’s consumer discretionary sector, which is benefiting from lower oil prices, rallied more than 4.3% for the week on Friday afternoon.
The 10-year Treasury yielded about 3.09% on Friday, but the 2-year Treasury yield outperformed the 10-year last week for the third time since late March. The result is what is known as an inverted yield curve, which sometimes signals a recession. The 2-year yield was 3.11% as of Friday afternoon.
Calendar of the week ahead
Monday
1:00 p.m. Auction of $43 billion in three-year Treasury bills
2:00 p.m. New York Fed President John Williams
Tuesday
Revenue: PepsiCo
6:00 a.m. NFIB survey
12:30 p.m. Richmond Fed President Thomas Barkin
1:00 p.m. Auction of $33 billion in 10-year Treasury bills
Wednesday
merits: Delta Air Lines, Fastenal
8:30 a.m. June CPI
1:00 p.m. Auction for $19 billion in 30-year bonds
14:00 federal budget
2:00 p.m. Beige book
Thursday
Merits: JPMorgan Chase, First Republic Bank, Conagra, Morgan Stanley, American Outdoor Brands, Cintas, Taiwan Semiconductor
8:30 am Weekly initial jobless claims
8:30 am June PPI
11:00 am Fed Governor Christopher Waller
Friday
Merits: Wells Fargo, Citigroup, PNC Financial, Bank of New York Mellon, US Bancorp, State Street, United Health
8:30 am June retail sale
8:30 a.m. Import prices
8:30 a.m. Empire State Manufacturing
8:45 am Atlanta Fed President Raphael Bostic
9:15 a.m. Industrial production
10:00 a.m. Consumer sentiment in July
10:00 a.m. Company inventory