Inflation Data, Powell's Testimony, and Big Bank Earnings: What to Know This Week

Infotrading.io - A pivotal week lies ahead for investors as they gear up for the release of crucial inflation data and the start of the second quarter earnings season. This comes after a holiday-shortened week that saw stocks close near record highs, driven by optimism in the market.

Inflation Data in Focus

The release of June's Consumer Price Index (CPI) on Thursday will be closely monitored by investors. With job growth showing signs of slowing, there is growing speculation that the Federal Reserve might cut interest rates in September. Economists expect headline inflation to have risen by just 3.1% annually in June, down from 3.3% in May, marking the slowest year-over-year inflation since July 2022. Core inflation, which excludes volatile food and energy prices, is forecasted to remain steady at 3.4%.

The CPI data is critical as it provides a comprehensive measure of inflation and influences the Federal Reserve's policy decisions. In May, inflation readings showed prices increasing at their slowest pace in 2024, leading Fed Chair Jerome Powell to remark that these readings "suggest that we are getting back on a disinflationary path." The June report will be the first test to see if this disinflationary trend continues, with Wall Street economists predicting a modest month-over-month price increase of 0.1%, slightly up from the flat reading in May.

Powell's Testimony

Federal Reserve Chair Jerome Powell's semiannual testimony before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday will be another key focus for investors. Powell's comments will be scrutinized for any hints about the Fed's future policy moves, particularly ahead of the July 30-31 meeting.

In light of the June jobs report, which showed signs of a cooling labor market, economists like Oxford Economics' Nancy Vanden Houten have bolstered their forecasts for a September rate cut. The report revealed that the U.S. economy added more jobs than expected, but the unemployment rate rose to 4.1%, its highest level since November 2021. Additionally, job gains for April and May were revised lower by 111,000, indicating that the labor market's robust gains over the past several months weren't as solid as initially thought.

Renaissance Macro's head of economics Neil Dutta noted that these economic conditions make the trade-offs different for the Fed, suggesting that Powell might use his July testimony to set up a September rate cut. As of Friday, investors were pricing in a roughly 75% chance that the Fed cuts rates by its September meeting, up from a 64% chance seen the week prior, according to CME Group's closely-monitored FedWatch Tool.

Big Bank Earnings

The second quarter earnings season kicks off with some of America's largest financial institutions reporting on Friday. JPMorgan (JPM), Wells Fargo (WFC), and Citi (C) are set to release their results, with investors keen to see how these financial giants have performed amid a challenging economic backdrop. The financial sector will be in particular focus over the next few weeks, with 40% of the S&P 500 companies reporting being from this sector, according to FactSet.

Despite not being expected to lead in earnings growth this quarter, with analysts forecasting a 4.3% year-over-year increase, the performance of the financial sector is crucial. Regional banks, in particular, are expected to report a significant decline in earnings growth, down by 26% year-over-year, highlighting ongoing concerns within the industry.

Yahoo Finance's David Hollerith recently reported that regional banks remain a key concern for the industry. This earnings season, the sector's performance will be closely watched to gauge the health and resilience of these financial institutions amid economic uncertainties.

Market Performance

Last week, the S&P 500 (^GSPC) and Nasdaq Composite (^IXIC) both finished at record highs, with gains of nearly 2% and over 3%, respectively. The Dow Jones Industrial Average (^DJI) saw a more modest rise of 0.5%. This robust market performance has set high expectations for the earnings season, with consensus forecasts for the S&P 500's earnings to grow 8.8% year-over-year in the second quarter, marking the highest growth since Q1 2022.

Goldman Sachs chief US equity strategist David Kostin noted that the reward for earnings beats might be smaller than average this quarter due to elevated investor sentiment. Last quarter, companies that beat expectations saw their shares outperform the S&P 500 by 3 basis points on the following day of trading, well below the historical average of 100 basis points.

Citi US equity strategist Scott Chronert warned that given the "lofty implied growth expectations," the prospect of large stock pops this quarter is limited. He emphasized that markets need to see solid execution and raised forecasts to sustain recent gains or push higher.

Looking Ahead

As investors brace for the release of inflation data, Powell's testimony, and the earnings reports from major financial institutions, the market's direction in the short term will largely depend on these factors. Deutsche Bank chief equity strategist Binky Chadha pointed out that while the market typically rises during earnings season, the recent run-up and overweight equity positioning could lead to a more muted rally.

This week's events will be critical in shaping market sentiment and guiding investment decisions. Investors should stay vigilant and closely monitor the outcomes of these key developments.