Top 5 Things to Watch in Markets in the Week Ahead

Top 5 Things to Watch in Markets in the Week Ahead

After a relatively quiet start to July that has seen the S&P 500 and other leading indices stage a rally, the pace of economic and corporate data picks up this week. The headline story will be the latest set of CPI reports, with analysts expecting an acceleration that will continue to hold the Federal Reserve’s feet to the fire. Q2 earnings season also kicks off, with banks and a few key S&P 500 components leading the way. Global unrest caused in part by inflation pressure has also picked up, setting us up for another hot summer week.

Here’s what you need to know to start your week.

CPI Reports

June inflation data comes out this week, with most countries releasing data on Wednesday. The U.S. consumer price index is expected to show an 8.8% year-over-year increase and a 1.1% month-over-month increase, which would be accelerations from last month’s number. Gas prices and the cost of energy are expected to be the main drivers, as the average price of crude oil was 3.6% higher in June than in May. Core CPI is expected to be 5.8% year over year, slightly down from May’s number.

French, German, and Spanish CPIs are all expected to stay at or near record levels, while U.S. producer price index readings are also expected to remain high at 10.7% year over year or 0.8% month over month.

The path towards consistent steep rate hikes and quantitative tightening seems fixed for the time being, with last week’s strong jobs report only bolstering the case for tighter monetary policy. The CPI report, which will be quite outdated by the time the Fed meets at the end of the month, may nevertheless make a difference on the margins.

Earnings Season Begins

Q2 Earnings season kicks off in full this week, with leading banks like JPMorgan Chase (NYSE:JPM) (Thursday pre-market), Morgan Stanley (NYSE:MS) (Thursday pre-market), Wells Fargo (NYSE:WFC) (Friday pre-market), Citigroup (NYSE:C) (Friday pre-market) all reporting. Banks traditionally open earnings season given their global perspective on economic activity. They’re also in the spotlight this year given the trends of interest rates on the one hand – rising rates normally benefit financial companies – and the looming threat of a recession on the other, which would hurt pro-cyclical companies like financials.

Several key industrial or consumer goods companies report as well. Delta Air Lines’ (NYSE:DAL) report (Wednesday pre-market) will be watched to see if recession worries, inflation, or the build-up of travel delays is taking the air out of a post-pandemic travel recovery. Taiwan Semiconductor’s (NYSE:TSM) earnings (Thursday pre-market) come after a strong June revenue update but amid concerns that the semiconductor down cycle has begun. And PepsiCo (NASDAQ:PEP) will report Tuesday morning; as a global snacks and beverages leader, it may offer insights into how inflation is sticking and affecting the consumer.

There has been much speculation that Q2 could be when we see companies truly take down numbers and “kitchen sink” (i.e. announce all bad news at once) the quarter gave the bear market backdrop. Analysts have yet to take down estimates drastically, so that looms as the major tension point for this quarter.

Retail Sales

U.S. retail sales data comes out on Friday, giving investors a more hands-on take on how consumers are responding to the current economic crosswinds. Sales are expected to increase 0.8% month over month, though that number is not adjusted for inflation. The strength of the consumer has been both a driver of inflation and a buoy for bulls in the face of mixed data and will be an interesting data point here.

Meanwhile, Amazon (NASDAQ:AMZN) will have its annual Prime Day on Tuesday and Wednesday, coming against a backdrop where many retailers have had to clear inventory and where the company has for now maintained some of its pandemic share-price gains, even as it trades close to 52-week lows.

Global Political Unrest

Sri Lanka’s President, Gotabaya Rajapaksa, was said to have stepped down in the wake of a protest crowd which ultimately stormed the presidential palace in Colombo.

This comes after years of financial mismanagement, exacerbated by the onset of the Covid-19 pandemic and pushed over the top by recent commodities inflation. While Sri Lanka’s situation is in many aspects unique, it is a reminder of the real-world impact of the current inflationary environment, with emerging markets often among the hardest affected.

Russia has continued to wage its war on Ukraine without signs of seeking compromise or negotiations, leaving the possibility of a prolonged conflict that could keep the inflationary pressure on. And British Prime Minister Boris Johnson’s resignation opens the door to more uncertainty in the UK as the jockeying for his replacement begins.

All of this serves as a reminder that geopolitical risk remains elevated in the current market climate.

More Twitter Drama?

The inevitable came to pass in a Friday night news dump, as Elon Musk filed a 13d/A form announcing his intention to terminate his agreement to buy Twitter (NYSE:TWTR) for $54.20/share. The letter attached to the form cited a ‘material breach of multiple provisions’ of the merger agreement, as well as the likelihood of a ‘Material Adverse Effect”, related to Musk’s expressed concerns that Twitter is understating the number of spam or bot accounts on the platform, as well as Twitter’s decision to fire two members of management since the deal was consummated.

Twitter’s Chairman, Bret Taylor, responded saying the company plans to pursue the completion of the deal, with the Delaware Court of Chancery being the next arena. Analysts have suggested that Twitter has the stronger hand legally. Still, the market’s pricing of Twitter shares ($35 at the end of Friday’s after-hours session) implies that the market as a whole believes Musk may be able to either win a lower price or walk away from the company without paying too big a price.

While it’s unclear how quickly the next moves will play out, the three months or so since Musk announced his initial stake have provided an entertaining, if perhaps disconcerting, look at how mergers & acquisitions play out and the state of the current market, so it’s fair to expect more fireworks.

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