What will the Fed do next? All eyes are on the upcoming July inflation report 📉

As the financial markets enter a critical week, all eyes are on the upcoming July inflation report and retail sales update. These key economic indicators, arriving just over a week before the Federal Reserve’s Jackson Hole symposium scheduled for August 22-24, are poised to significantly influence market sentiment. The heightened focus on U.S. recession risks has intensified after the Sahm Rule was triggered, a signal that occurs when the three-month moving average of the unemployment rate rises by 0.5% relative to its low point in the previous 12 months. This economic signal has further fueled market concerns, with federal funds trading now reflecting nearly equal odds of a 25-point or 50-point rate cut at the Fed’s September meeting.

Key Economic Indicators: Inflation and Retail Sales

The July inflation report and retail sales update are two of the most closely watched economic indicators. Both reports will provide critical insights into the current state of the U.S. economy and could heavily influence the Federal Reserve’s policy decisions in the coming months.

All Eyes Will Be On Inflation Report

The CPI inflation report on Wednesday, August 14, 2024, is expected to shed light on whether price pressures are easing or if inflation remains stubbornly high. With the Fed closely monitoring inflation data as it considers its next steps, any surprises in the report could lead to significant market volatility. Investors are particularly interested in core inflation, which excludes volatile food and energy prices, as it provides a clearer picture of underlying inflation trends.

Economists are forecasting the Consumer Price IndexThe Consumer Price Index is a measure of the average price level of a basket of goods and services that are commonly consumed by households. More (CPI) to firm up to a 0.3% month-over-month pace, following a surprising downside in June. This anticipated rise is largely attributed to an increase in core services inflation and energy prices, which is expected to keep the year-over-year rate steady at 3%. Core CPI, which excludes volatile food and energy prices, is predicted to grow by 0.2% month-over-month, aligning with the Federal Reserve’s benchmarks that could pave the way for potential rate cuts in September.

The modest uptick in core CPI is driven by rising inflation in core services, particularly in non-housing services and shelter prices, which are expected to increase by 0.3% month-over-month. Conversely, core goods prices are projected to decline for the fifth consecutive month, mainly due to falling vehicle prices. However, there are potential risks on the upside due to increasing shipping costs. If the July CPI meets expectations, it could reinforce the Fed’s strategy to initiate rate cuts in September, even as financial markets lean towards expecting more aggressive cuts.

Retail Sales Update

The retail sales update will offer valuable insights into consumer spending, a key driver of the U.S. economy. Given that consumer spending accounts for a significant portion of economic activity, the report will be closely scrutinized to gauge the health of the economy. Strong retail sales could indicate that consumers remain resilient despite economic uncertainties, while weaker-than-expected sales could heighten recession fears.

Major Earnings Reports: Retail Giants in the Spotlight

Alongside these critical economic reports, the earnings calendar for the week is packed with major announcements from some of the largest companies in the world. Retail giants Walmart (WMT) and Home Depot (HD) headline the list, with their results serving as key indicators of consumer behavior and the broader retail sector.

Monday, August 12 – Ballard Power (BLDP), Barrick Gold (GOLD), monday.com (MNDY), DHT (DHT), and Rumble (RUM).

Tuesday, August 13 – Home Depot (HD), Tencent Music (TME), Sea Limited (SE), and On Semiconductor (ONON).

Wednesday, August 14 – UBS Group (UBS), Cardinal Health (CAH), Brinker International (EAT), StoneCo (STNE), and Cisco (CSCO).

Thursday, August 15 – Walmart (WMT), Applied Industrial (AIT), Ross Stores (ROST), Alibaba (BABA), Applied Materials (AMAT), Deere (DE), JD.com (JD), and Tapestry (TPR).

Friday, August 16 – Flowers Foods (FLO), and CI&T (CINT).

Walmart (WMT) – Reporting Thursday, August 15

Walmart, the world’s largest retailer, is more than just a retail giant; it is a crucial barometer for consumer spending habits across the globe. Investors closely follow Walmart’s earnings as they provide insights into the health of consumer demand, particularly in challenging economic environments. For this quarter, expectations are high, with markets hoping for a beat-and-raise guidance. Such an outcome would suggest that consumers are continuing to spend despite economic headwinds, which could provide a significant boost to market sentiment.

Home Depot (HD) – Reporting Tuesday, August 13

Home Depot, the largest home improvement retailer in the U.S., is another critical stock to watch this week. As a bellwether for the housing market and consumer confidence, Home Depot’s performance is often seen as an indicator of broader economic conditions. The company has benefited from strong demand for home improvement products, driven by rising home values and increased DIY activity. However, with economic uncertainty on the rise, investors will be keen to see if Home Depot can maintain its growth momentum or if consumer spending in this sector is beginning to wane.

Other Notable Earnings Reports

Beyond Walmart and Home Depot, several other major companies are set to report earnings, each offering insights into different sectors of the economy.

Cisco (CSCO) – Reporting Wednesday, August 14

Cisco, a global leader in networking hardware and software, is a key player in the tech sector. Investors closely monitor Cisco’s earnings as they provide valuable information about enterprise spending on IT infrastructure. With digital transformation and cybersecurity being top priorities for businesses, Cisco’s performance can offer clues about the health of the broader tech industry and the demand for networking solutions.

Alibaba (BABA) and JD.com (JD) – Both Reporting Thursday, August 15

Alibaba and JD.com, two of China’s largest e-commerce platforms, are critical stocks for investors interested in the Chinese economy. These companies’ earnings reports will be closely watched for insights into consumer demand in China, especially amid ongoing geopolitical tensions and economic challenges. Their performance could also have broader implications for global markets, given China’s significant role in the world economy.

Applied Materials (AMAT) – Reporting Thursday, August 15

Applied Materials, a leading provider of equipment, services, and software for the semiconductor industry, will also report earnings this week. As the semiconductor sector faces supply chain disruptions and increasing demand, Applied Materials’ results will be critical for understanding the broader dynamics of the tech industry, particularly in chip production.

Deere & Company (DE) – Reporting Thursday, August 15

Deere, known for its agricultural machinery, is a key company to watch for insights into the agricultural and construction sectors. Deere’s earnings report will provide valuable information on the health of these industries, especially as they navigate challenges like climate change and trade policies.

Tapestry (TPR) – Reporting Thursday, August 15

Tapestry, the parent company of luxury brands like Coach, Kate Spade, and Stuart Weitzman, will also report earnings this week. As a player in the high-end retail market, Tapestry’s results will offer insights into consumer sentiment in the luxury goods sector, particularly in the face of inflationary pressures and economic uncertainty.

Looking Ahead

This week’s economic indicators and earnings reports will be pivotal for investors as they navigate an increasingly uncertain landscape. With major companies like Walmart, Home Depot, Cisco, and Alibaba set to reveal their quarterly performances, the insights gained will be crucial in shaping market expectations ahead of the Federal Reserve’s Jackson Hole symposium. Investors will be closely monitoring these developments, not only for immediate impacts on stock prices but also for longer-term signals about the health of the U.S. and global economies.