Another hot inflation report, Q2 earnings make for difficult week ahead

Traders on the ground of the NYSE, June 29, 2022.

Source: NYSE

Consumer inflation knowledge and the beginning of the second-quarter earnings season may very well be two catalysts that make for a bumpy experience in markets within the week ahead.

PepsiCo’s earnings are the primary main report of the week Tuesday, and Delta Air Lines stories Wednesday. JPMorgan Chase and Morgan Stanley kick off financial institution earnings season Thursday, and Wells Fargo, Citigroup and PNC Financial, amongst others, observe on Friday.

A cluster of inflation stories might have an effect on markets, since they assist set the tone for how aggressive the Federal Reserve must be in its battle to calm inflation.

The June shopper worth index looms massive on Wednesday, and economists count on it may very well be hotter than May’s 8.6% year-over-year tempo. It can be the report that would transfer markets most.

“The headline is expected to be higher. That’s mostly because of energy,” mentioned Peter Boockvar, chief funding officer at Bleakley Advisory Group. He added that core inflation, excluding meals and vitality, may very well be decrease. West Texas Intermediate crude futures have been as excessive as $122 per barrel in June, however have since fallen again in July and was slightly below $105 per barrel Friday.

“The question is to what extent the moderation in goods prices is going to be offset by continued increasing services prices, predominantly driven by rent,” Boockvar mentioned. “The government stats still have a lot of catchup room to the upside on rent.”

There can be the June producer worth index Thursday, and traders are carefully watching Friday’s University of Michigan shopper sentiment report for July. That report incorporates shopper expectations about future inflation, an essential metric watched by the Federal Reserve. June retail gross sales, one other measure of the buyer, can be launched Friday.

“PPI is the seed for CPI … and it could have another 10% handle,” mentioned Boockvar.

The new inflation knowledge comes on the heels of Friday’s sturdy employment report. In June, the financial system added 372,000 jobs, about 120,000 greater than anticipated. Strategists say the report bolstered expectations that the Federal Reserve will elevate charges by one other 75 foundation factors later this month. A foundation level is one one-hundredth of a proportion level.

“It was enough to continue on the path they’ve chosen. It’s not until you start to see rising unemployment on a monthly basis that I believe the Fed will start to buckle its knees,” mentioned Boockvar.

A key query for markets is when will inflation peak, because it has already continued to flare greater for much longer than the Fed had initially anticipated.

“I do think a risk to the markets is this fact that inflation may not have peaked,” mentioned Michael Arone, chief funding strategist at State Street Global Advisors. “I do still believe the markets are at least hopeful, if not expecting, that inflation will decelerate.”

As traders watch the tempo of inflation, the second-quarter earnings season begins. Corporate earnings may very well be the supply of some market turbulence, if analysts are power to cut estimates for the steadiness of the yr, as many count on.

“The street has not really changed the estimates. Revenue growth has ticked down. Margins are compressing. Analysts are leaving their estimates unchanged,” mentioned Boockvar. “If there’s going to be a readjustment, this is the time.”

Second-quarter earnings for the S&P 500 are anticipated to develop by 5.7%, based on I/B/E/S knowledge from Refinitiv. The third- and fourth quarter estimates have been shifting down barely, however are nonetheless 10.9% and 10.5%, respectively.

“I think the market is bracing for a challenging earnings quarter, so how much it will result in volatility is unclear,” mentioned Arone. He mentioned firms will proceed to beat however possibly by not as a lot. “I think they will lower their guidance. Why not? It just makes it easier to beat down the road. I do think earnings season will be a disappointment. It will be interesting to see how the market reacts.”

Stocks previously week have been greater, with the S&P 500 gaining 1.9% to three,899. The Nasdaq rose 4.5% for the week.

The worst-performing main sectors for the week have been utilities and vitality. The S&P shopper discretionary sector, which advantages from decrease oil costs, bounced greater than 4.5% on the week.

The 10-year Treasury notice was yielding about 3.07% Friday, however the 2-year notice yield surpassed the 10-year this previous week for the third time since late March. The result’s a so-called inverted yield curve, which does typically sign recession. The 2-year yield was at 3.11% Friday afternoon.

Week ahead calendar

Monday

1:00 p.m. $43 billion 3-year Treasury notice public sale

2:00 p.m. New York Fed President John Williams

Tuesday

Earnings: PepsiCo

6:00 a.m. NFIB survey

12:30 p.m. Richmond Fed President Thomas Barkin

1:00 p.m. $33 billion 10-year Treasury notice public sale

Wednesday

Earnings: Delta Air Lines, Fastenal

8:30 a.m. June CPI

1:00 p.m. $19 billion 30-year bond public sale

2:00 p.m. Federal funds

2:00 p.m. Beige ebook

Thursday

Earnings: JPMorgan Chase, First Republic Bank, Conagra, Morgan Stanley, American Outdoor Brands, Cintas, Taiwan Semiconductor

8:30 a.m. Weekly preliminary jobless claims

8:30 a.m. June PPI

11:00 a.m. Fed Governor Christopher Waller

Friday

Earnings: Wells Fargo, Citigroup, PNC Financial, Bank of New York Mellon, U.S. Bancorp, State Street, UnitedHealth

8:30 a.m. June retail gross sales

8:30 a.m. Import costs

8:30 a.m. Empire state manufacturing

8:45 a.m. Atlanta Fed President Raphael Bostic

9:15 a.m. Industrial manufacturing

10:00 a.m. July shopper sentiment

10:00 a.m. Business inventories

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