Will Good Economic News Actually Be Good News for Stocks?
After a wildly volatile week, the stock market emerged nearly flat as panic over a potential recession gave way to hopes the Federal Reserve may have room to keep rates higher for longer. This whipsaw action sets the stage for an important stretch of economic data that could determine if bad news continues being cheered or if good news makes a comeback.
Key Data to Watch
The main event is Wednesday's July Consumer Price Index report. Economists expect inflation cooled slightly from June, with headline CPI up 3% year-over-year and core CPI rising 3.2%. A hotter-than-expected print could reignite fears of stubbornly high inflation forcing more aggressive Fed rate hikes.
On Thursday, July retail sales data will offer insights into the health of the U.S. consumer. Sales are projected to rise 0.3%, decelerating from June's robust 0.8% gain excluding autos and gas. Softening demand could stoke worries about an economic downturn.
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Rate Cut Bets Swing Wildly
The coming releases follow an about-face in rate cut expectations over the past two weeks. Markets went from pricing zero chance of a September rate cut to betting on a 50 basis point cut - before cooling slightly to imply around a 50% chance of such an aggressive move.
Michael Gapen, Bank of America's head of U.S. economics, says if the data comes in as expected, "we look for the market to price in fewer cuts this year and reduce the likelihood of a large cut in September."
Good News is Good Again?
This regime shift could have major implications. After months of bad news boosting stocks on hopes of easier Fed policy, Michael Kantrowitz of Piper Sandler believes "good news is actually going to be very good, and bad news is going to be very bad" going forward.
Corporate Profits in Focus Too
Adding to the drama, Q2 earnings for S&P 500 companies are tracking a solid 10.8% growth rate so far. Any cracks in the corporate profit picture could further fuel volatility.
Buckle Up for More Swings
Volatility is likely to persist as markets grapple with the latest economic tea leaves and attempt to deduce the Fed's next steps. After last week's wild swings, investors will be keeping watchful eyes on the incoming numbers to determine if positive data is solidifying the rally's foundation or planting seeds for the next sell-off.
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