Investors Wait For CPI and Start of Earnings This Week (Premium Edition)

Increased fears of a recession caused the financial markets to undergo another wild week. However, many indexes recorded some slight gains due to investor bargain hunting and China’s economic rebound. Overall, Wall Street had a good week, but equities remain bearish.

Last Friday, the Labor Department reported that nonfarm payrolls increased by 372,000 last month after rising by 390,000 in May. This is far more than the 265,000 jobs predicted by the Bloomberg consensus estimate.

The report caused mixed feelings among investors because it might support the Fed’s case for accelerated rate hikes.

At 3.6 percent, the unemployment rate remained close to pre-pandemic lows, and average hourly earnings rose for the third consecutive month. According to the data, The Fed may read that the labor market and economy are robust.

Thus the Fed can make more drastic rate increases to combat inflation, even though traders may not welcome this. It indicates a chance of a soft landing for the economy which has not historically happened. What is more likely is a larger recession.

KEY MARKET DRIVERS & CALENDAR

  • Rising Inflation, Recession & Stagflation Fears
  • Wednesday, July 13 – Core CPI (MoM) (June)
  • Friday, July 15 – Retail Sales (MoM) (June)

This week is the beginning of the earnings season and CPI; thus, volatility is anticipated to persist.

On Tuesday, the NFIB small-business index for June will be released. May saw a decline in small company optimism, mostly due to inflation and a tight labor market raising salaries.

The June Consumer Price Index, which is related to inflation, is coming on Wednesday. May saw the highest annual inflation rate since December 1981, up 8.6 percent. The most recent reading of core inflation, which excludes food and energy, increased by 6% and was also more than predicted. The Federal Budget and Beige Book will be public in the afternoon.

The second quarter’s Chinese growth will be a worldwide discussion topic because the first estimate will be released on Friday. China’s atmosphere is becoming agitated. Some of the recent bad news appears to have been absorbed by the market. It no longer excludes the notion that tight monetary controls could reduce inflation without seriously harming the economy.

In this regard, the tendency has been backed by the Chinese government’s stimulus programs, which encourage local governments to spend in particular. Additionally, there have been speculations that the US may lower its tariffs on specific Chinese goods. But these haven’t yet received any attention.

S&P 500 SECTORS

Tip: Use this section to know various sectors’ performance, and weight portfolios, or look for trades. Modern portfolio theory stresses the importance of diversification, but recently several sectors like technology have outperformed others like utilities. This is also a way to narrow the sectors to find investment opportunities.

FEDERAL RESERVE & RATE INCREASES

Following last week’s release of the minutes from the Fed’s June meeting and economic data, observers of the Fed have more reason to guess about the officials’ possible future actions. Most are assuming a probable rate hike at the meeting that is set for July 27. The big question is how much of a rate increase and how the Fed may interpret new data.

The meeting agenda discusses whether the Fed will risk triggering a recession to lower inflation and whether inflation expectations are rising. To stop price hikes, officials have hinted that they aim to raise rates to roughly 3.4 percent by the end of the year.

By the time of the Fed’s July meeting, new information will be available. Given the current economic climate, the Fed may turn out to be less responsive to new data than in the past.

The intriguing thing is that long-term interest rates have recently declined, which usually indicates decreasing inflation expectations. Although I reject the idea that inflation expectations influence actual inflation, the Fed’s decision to ignore long rates seems odd if it is acting on that premise.

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EARNINGS

Investors are currently anticipating the commencement of next week’s publication of companies’ earnings and projections. It will provide investors with more insight into how the companies (which have remarkably survived the inflationary shock) are seeing less demand or price pressures lowering profits.

Banking sector investors will be keeping an eye on whether increased revenue from credit lines can make up for the reduction in mortgage originations and refinancings.

While Amazon Prime Day and rival online specials will command attention in the retail sector, the corporate schedule for the week includes investor events for Dave & Buster’s Entertainment (NASDAQ: PLAY), Ferroglobe PLC (NASDAQ: GSM), Suncor (NYSE: SU), and Pure Cycle Corporation (NASDAQ: PCYO).

RATES

The week was highlighted by an increase in US bond yields. Ten-year debt currently pays 2.99 percent, which is a bit less than the 2.02 percent and 3.02 percent offered by the 2- and 5-year maturities. This inversion emphasizes recession concerns by even the slightest of margins. The German bond is back at 1.27 percent, and the French 10-year OAT is at 1.81 percent, returning to early June levels after peaking at 2.4 percent in the middle of last month. In Europe, the trend is still bearish.

INFLATION UPDATE

This week, inflation is again slightly down but hasn’t reversed the trend. In past rising interest rate environments rising inflation came in waves. It will also become a major political issue going into elections as Americans pay more for everything.

We follow Truflation. Decentralized finance (DeFi) firm Truflation is based on the same calculation method as the CPI but is different in that it uses real “price data” versus the government’s survey data. It uses current real-market prices data from Zillow, Penn State, and Nielsen to measure and report inflation changes each day.

COMMODITIES

OIL

Prices fell this week due to escalating recessionary concerns that cloud the outlook for black gold demand. The global benchmarks, US WTI and North Sea Brent, momentarily traded below $100 per barrel. As Western sanctions put pressure on Russia’s supply, Norway’s Equinor stated that operations at its three strike-affected oilfields had resumed. OPEC, however, reaffirmed its concerns about the ability of oil-producing nations to boost their production. Regarding pricing, WTI, the US benchmark, is currently trading at $101.

GOLD

It is impossible to say that sentiment in the base metals sector is improving. Copper is under continual pressure and is currently around $7,835, where a fresh weekly downturn has begun. The market is still preoccupied with recession worries, which are directly related to falling industrial metal demand, much like it is with oil.

However, China just unveiled a new stimulus plan worth $220 billion to increase infrastructure development, which could help maintain demand. A strong American dollar and rising bond yields have caused gold prices to drop to a new yearly low of $1,735 in the gold, where sentiment is not much better. Silver’s trend is the same at USD 19.10.

CRYPTOCURRENCY

Bitcoin is beginning July a little calmer than it did in recent weeks. The digital currency has somewhat recovered since Monday in response to stock market indexes and is currently flirting with $21,500. Thus, cryptocurrency investors have had a week of reprieve on bitcoin, albeit for some, it will be a long time before they see their positions return to the black following a historic June that witnessed a -37 percent underperformance on the commodity.

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