U.S. CPI and Retail Sales Take Center Stage After "Fearful Week," U.S. Stocks Still Expected to Remain Volatile

According to the latest information from Zhitong Finance and Economics APP, after a turbulent week, investors will closely watch the US Consumer Price Index (CPI) and retail sales report for July, which will be released this week, to assess the Fed's interest rate cut prospects. In addition, consumer confidence, initial jobless claims, and manufacturing output data will also be key focal points.

It is understood that due to concerns about a recession triggered by the weak US July employment report, coupled with unwinding of yen carry trades exacerbating volatility, global stock markets experienced a "Black Monday" last Monday, with the S&P 500 plunging nearly 4% on that day, marking the largest single-day drop since 2022. As initial jobless claims in the US fell more than expected, easing panic, US stocks basically recovered from the previous week's decline by last Friday.

On the corporate front, as the US earnings season nears its end, investors will focus on the earnings reports of Home Depot (HD.US) and Walmart (WMT.US) this week to understand the state of consumer spending.

Aggressive Betting on Fed Rate Cuts

After the July employment report heightened concerns about the Fed possibly keeping rates too high for too long, the intense debate on Wall Street shifted from when the Fed would start cutting rates to how much the Fed should cut.

According to the FedWatch Tool from the Chicago Mercantile Exchange, as of last Friday afternoon, the market estimated a 50% chance of the Fed cutting rates by 50 basis points before the end of the September meeting, down from 75% a week ago.

However, some economists still believe the pricing is too aggressive.

Goldman Sachs Chief Economist Jan Hatzius stated in a report on August 7th, "Rising unemployment and falling inflation further support Fed easing, and we expect a cumulative 200 basis points of rate cuts over the next 1-2 years."

"However, we believe the market pricing is too aggressive in the short term, especially considering the possibility of a 50 basis point rate cut at the FOMC meeting on September 17-18."

Investors are readjusting their bets on rate cuts in 2024

Inflation Once Again in Focus

The US will release the Consumer Price Index (CPI) for July on Wednesday. Market forecasts suggest that the overall CPI, including food and energy prices, will rise by 3% year-on-year, unchanged from June. After a 0.1% decline in inflation in June, it is expected to increase by 0.2% month-on-month.

The core CPI, which excludes food and energy prices, is forecasted to rise by 3.2% year-on-year, slightly slower than the 3.3% increase in June. The core CPI is expected to increase by 0.2% month-on-month, higher than the 0.1% in June.

Senior Economist Sarah House from Wells Fargo Bank stated, "The July CPI report may further prove that inflation is slowing down, even if it has not yet fully returned to the Fed's target level." Retail Data

The U.S. retail sales data for July, to be released on Thursday, will also be closely watched as investors look for clues on whether the U.S. economy (and crucially U.S. consumer spending) is slowing down.

Economists expect a month-on-month growth of 0.3% in July retail sales. Retail sales excluding gasoline and automobiles are expected to increase by 0.2%, a slowdown from the 0.8% growth in June.

Michael Gapen, chief economist at Bank of America, emphasized in a report last week that soft retail sales "may not excite the market as it remains aware of downside risks." However, considering the significant growth in retail sales in June, the soft data in July still "keeps spending for the quarter on a fairly strong trajectory."

Gapen stated, "Overall, if (retail sales and inflation) data come in as we expect, we forecast that market expectations for the extent of rate cuts this year will cool, and the likelihood of a significant rate cut in September will also diminish."

Stock Market Needs "Good" News

The latest data from FactSet's senior analyst John Butters shows that earnings for S&P 500 index component companies are expected to grow by 10.8% year-on-year, the highest annual growth rate since the fourth quarter of 2021.

However, Scott Chronert, U.S. stock strategist at Citigroup, pointed out that "over the past two weeks, corporate earnings have taken a back seat to price movements driven by macro factors."

Last Thursday, the S&P 500 index rebounded by 2.3% as initial jobless claims dropped significantly, easing concerns about the economy, marking the largest single-day gain since 2022.

Nicholas Colas, co-founder of DataTrek, wrote in a report last Friday that the stock market saw such a massive rebound after reports like initial jobless claims were released, "more due to the market's fragile state and nervousness about economic data."

This makes the data in the coming week particularly noteworthy.

If after the release of data in the coming week, the market reduces bets on the extent of Fed rate cuts and U.S. bond yields rise, this could have a positive impact on the stock market, as the market is shifting to an environment where bad news is bad news and good news is good news.

U.S. Stocks and Bonds Return to Negative Correlation

Michael Kantrowitz, chief investment strategist at Piper Sandler, stated last Friday, "Good news will not only be good news, I think good news will actually be very good, and bad news will be very bad."

"We will see a lot of good days, and we will see a lot of bad days, market volatility will be much greater than what we have seen for most of this year."