Wall Street is growing increasingly uneasy about the health of the U.S. economy. Households are also feeling the pinch, and if this week’s economic and earnings reports bear that out, it could derail the stock market’s recovery from its worst day in two years.
U.S. stocks ended a turbulent week on Friday after the unwinding of yen-driven carry trades and concerns about a weakening U.S. economy rocked global financial markets. At the end of the week, all major indexes failed to fully reverse their losses for the week.
The S&P 500 fell less than 0.1% last week, the Nasdaq Composite fell 0.2% and the Dow Jones Industrial Average fell 0.6% over the same period, according to FactSet data.
The focus has shifted to a slew of new U.S. economic indicators due later this week, including the July Consumer Price Index (CPI) report, the latest retail sales and earnings from some of the nation's top retailers, as investors try to discern whether U.S. households face greater pressure from rising inflation and interest rates.
"Financial markets have stabilized for now after a brief 'Wile E. Coyote' moment caused by concerns about the risk of a hard landing," said a team of economists at BofA Global Research, led by Michael Gapen. "From here, the data will tell us what kind of economy we have: a gradual or sharp slowdown."
Like all important economic data releases, the July CPI data is likely to have serious implications for the markets and the Fed, but investors will be paying closer attention this time as they worry that any signs of a slowdown and signs that inflation is not softening enough could send stocks reeling.
Economists surveyed by The Wall Street Journal expect overall inflation to remain steady at 3% year-on-year in July, while the core CPI is expected to slow to 3.2% from 3.3% in June.
Brian Weinstein, head of global markets at Morgan Stanley Investment Management, said inflation will remain above the Fed's target for some time because historically it is "very rare" for the CPI to remain stable below 2%.
“There appears to be inflation in some of the painful areas, like auto insurance and homeowners insurance, especially in places where there are population surges that are taking money out of consumers’ pockets every month,” Weinstein said.
He also mentioned that uncertainty surrounding geopolitical conflicts and the economic plans of 2024 U.S. presidential candidates is "enough to prevent inflation from meaningfully returning to below 2%."
Consumers’ wallets are getting thinner, and businesses are feeling it. The Fed’s plan to keep price pressures in check while keeping the economy humming was going well in the first half of the year, but that plan began to shift in the past few months when consumer-facing companies began to highlight early signs of a slowdown in consumer spending.
Luxury goods group LVMH last month reported a second-quarter sales decline in its China-focused Asia excluding Japan business, which accounts for 30% of its revenue in the first half of 2024. McDonald's Corp MCD.N reported last week that inflationary pressures are making its consumers, especially lower-income households, more selective about how they spend their money, while vacation rental platform Airbnb ABNB.O expects leisure travel to slow as consumers hold off on booking overnight stays amid lingering economic uncertainty.
Years of persistent inflation and the Federal Reserve’s monetary tightening cycle have squeezed the savings that American households built up during the pandemic. Many consumers have had to be more selective about what they buy and where they spend their money.
"I was shocked to see most of the consumer-facing companies, like Starbucks (SBUX.O) and McDonald's, issuing profit warnings, which certainly suggests a very tough consumer environment," said Brad Conger, chief investment officer at Hirtle Callaghan & Co. "It speaks to the fact that consumers' pent-up savings, their confidence in jobs and future incomes, have been depleted."
That makes the upcoming earnings reports from the nation's largest retailers another big event for the U.S. stock market this week.
With Walmart Inc (WMT.N) and Home Depot (HD.N) set to report earnings on Tuesday and Thursday, respectively, investors are awaiting more evidence about the state of the consumer from companies that sell everyday household staples.
Conger said the weakness in consumer spending could spread to other parts of the consumer industry. “People are pulling back on all kinds of spending, so that means businesses are cutting back when they’re planning to hire, and that feeds back into employment and income,” he said.
To be sure, economic data has shown mixed signs of growth so far this year. Earlier last week, the services sector rebounded in July, bucking a growing view that the U.S. may be heading for a recession. The number of Americans applying for unemployment benefits fell to 233,000 last week, retreating from a one-year high, suggesting the labor market may still be in good shape despite a soft July jobs report.
The two reports last week helped stocks recover some of their weekly losses from Monday's sharp sell-off.
“The stock market is a little bit scared and fragile...but the small uptick in economic data will not have a big impact on market sentiment, that is, if there are more positive data in the next few weeks, the impact of each data on the market will gradually weaken,” Conger told MarketWatch. “Right now, the market is so fragile that it is overreacting.”
Weinstein said there is more market volatility ahead, which could put a cap on the upside for stocks. But I don’t think it means we’re going to have a hard landing. I don’t think it guarantees a recession,” he added.
The article is forwarded from: Jinshi Data
