"Super Data Week" is coming, is the rebound of US stocks destined to be bumpy?

After a turbulent week, the focus of the US stock market this week has shifted to a series of key economic indicators and corporate earnings—July CPI inflation, retail sales data, initial jobless claims, and the earnings of global retail giants... Investors will assess whether American households are facing higher inflation and more pressure from higher interest rates.

"After concerns about the risk of a hard landing in the financial markets led to a brief Wile E. Coyote moment, stability has temporarily returned," wrote economists from the Bank of America Global Research team led by Michael Gapen. "From now on, data will tell us about the state of the US economy: is it gradually slowing down or plummeting sharply?"

Where is Inflation Heading?

The US July CPI will be released on Wednesday evening. Economists expect the overall CPI for July to remain at a year-on-year growth rate of 3%, while the core CPI, which excludes food and energy cost fluctuations, is expected to slow down from 3.3% in June to 3.2%, potentially hitting the lowest level since May 2021, which could boost rate cut expectations.

Brian Weinstein, Global Head of Markets at Morgan Stanley Investment Management, stated that since historically keeping CPI below 2% is "rare," inflation is likely to stay at a higher level than the Fed's target for some time.

Weinstein told the media over the phone:

In some painful areas like car insurance and home insurance, inflation seems to exist, especially in places with a surge in population, where money is taken out of consumers' pockets every month.

He also mentioned that geopolitical conflicts and the uncertainty of economic policies after the US election are enough to "prevent inflation from returning to below 2%." More clues will be provided by the July PPI data released on Tuesday.

Focus on Consumer Data and Retail Giants' Earnings Reports

For the "super data week," some believe that the retail sales and initial claim data to be released on Thursday may be more important than the PPI and CPI inflation data. This is because the market consensus is already on the decline in inflation, and the key to the Fed's decision to cut rates by 25 or 50 basis points in September lies in the economic situation.

Consumer spending remains weak and has already begun to impact corporate profits.

Luxury goods group LVMH's earnings report showed a decline in revenue in the Asian market (excluding Japan) from the second quarter, while McDonald's last week's earnings report indicated that inflation pressure is making consumers, especially low-income families, more selective in how they spend money. Airbnb expects its leisure travel business to slow down as consumers postpone booking overnight stays due to uncertain economic prospects.

Years of sustained inflation and the Fed's monetary tightening cycle have squeezed American households, who have depleted the savings they accumulated during the pandemic and are forced to "downgrade" their consumption.

Brad Conger, Chief Investment Officer at Hirtle Callaghan & Co., said: Most consumer-facing companies, such as Starbucks and McDonald's, have issued profit warnings, which has left a deep impression on me. This undoubtedly indicates a very challenging consumer environment. It shows that consumers' suppressed savings have been exhausted, along with their confidence in work and future income.

The spending power of American consumers has made the upcoming earnings reports from some retail giants this week another focus of the US stock market.

Walmart and Home Depot are scheduled to release earnings reports on Tuesday and Thursday respectively, with the market expecting more clues about consumer conditions from these companies selling daily necessities.

Conger said that weak consumer spending may spread to other parts of the consumer sector.

"People are cutting various expenses, which means that businesses will cut back on hiring when planning, and this will then feed back into employment and income."

Nevertheless, last week's labor market data showed some positive signals. The largest drop in initial jobless claims in a year was recorded for the week of August 3, indicating that the labor market may still be robust, providing some comfort to the market.

Investors are "jumpy"

Analysts expect that market volatility will increase due to geopolitical conflicts and uncertainty brought by the economic plans of the 2024 US presidential candidates. A report by Citigroup pointed out that traders expect the S&P 500 index to experience at least a 1.2% volatility when the CPI report is released on Wednesday. (source)

Although this does not necessarily signal an economic hard landing or recession, the market's instability may limit the upside potential of the stock market.

Conger said:

"The US stock market is a bit panicked and fragile... but small surprises in economic data will not lead to significant market sentiment changes, which means that if there are more positive data points in the coming weeks, each one will gradually have a smaller impact on the market. Currently, the market is so fragile that it is likely to overreact.

Weinstein shares a similar view, stating that the market will see more volatility, which could "constrain" the upside potential of the stock market.

"But I don't think this means a hard landing, and the US economy may not necessarily go into a recession."