Market Volatility Persists Despite Late-Week Rally, Key Data Points to Watch Next Week
The stock market experienced a wild week, with investors navigating a rollercoaster of emotions fueled by uncertainty surrounding the economy and the Federal Reserve’s future monetary policy moves. The week began with the S&P 500 suffering its worst day since 2022, driven by concerns about a potential recession triggered by a disappointing July jobs report and the unraveling of the yen carry trade. However, the market staged a remarkable comeback towards the end of the week, with the S&P 500 and Nasdaq Composite erasing their early losses, driven by encouraging labor market data. As investors brace for more volatility in the coming week, several key data releases will be pivotal in shaping market sentiment.
Key Takeaways:
- Volatility is here to stay: The market remains highly sensitive to economic data and is expected to undergo further swings.
- Inflation takes a backseat: Focus has shifted from inflation to labor market conditions and economic growth.
- Fed rate cut expectations: The market is now uncertain about the magnitude of the Fed’s next rate cut, with expectations for both a quarter- and half-percentage point cut in September.
- Consumer and producer prices in the spotlight: Data releases on consumer and producer prices will be closely scrutinized next week, along with retail sales and unemployment claims.
- Earnings insights: Earnings reports from major retailers like Walmart and Home Depot will provide valuable insight into consumer spending and the overall health of the economy.
- Some see a calming trend ahead: While some experts anticipate continued market volatility, there is a growing view that stocks may stabilize as recession fears subside, especially if the Fed cuts rates.
The Balancing Act: Labor Market, Inflation, and Rate Expectations
While inflation has been a primary concern for much of the past year, the focus has recently shifted towards the labor market. Investors are increasingly concerned about the strength of the U.S. economy, particularly with a potential recession looming. This focus on job growth and the health of the labor market is evident in the market’s reaction to data such as weekly unemployment claims, which typically don’t generate significant market movement. However, the slight decrease in claims last week, defying expectations, sparked a rally in the S&P 500.
The Fed’s monetary policy is another key factor driving market sentiment. The CME Group’s FedWatch tool now shows a 50-50 chance of the Fed cutting rates by either a quarter- or half-percentage point at its September meeting. This uncertainty reflects the market’s struggle to assess the economic landscape and the appropriate response from the Fed.
Data Releases to Watch:
Next week’s economic calendar is packed with crucial data points that could significantly influence market direction. Here’s a breakdown of the key releases to watch:
Tuesday, August 13:
- Producer Price Index (PPI) for July: This report will provide insight into inflationary pressures at the wholesale level. Economists expect a 2.3% year-over-year rise.
- Earnings: Home Depot: The home improvement retailer’s earnings report is expected to provide insight into consumer spending on discretionary goods.
Wednesday, August 14:
- Consumer Price Index (CPI) for July: This is arguably the most anticipated data release of the week, as it provides a direct measure of inflation for consumers. Economists expect the CPI to show a 3% year-over-year increase, unchanged from the previous month.
- Earnings: Progressive: This insurance company’s earnings report could provide insight into consumer finances.
Thursday, August 15:
- Initial Jobless Claims: This weekly report is a key indicator of labor market conditions. Economists are expecting 233,000 claims for the week ending August 10.
- Retail Sales for July: This report will provide crucial data on consumer spending in the critical July period. Economists anticipate a modest 0.3% increase.
- Earnings: Applied Materials, Walmart, Tapestry, Deere & Co.: These earnings reports will offer a variety of insights into different sectors of the economy, from semiconductors to retail and agriculture.
Friday, August 16:
- Building Permits and Housing Starts for July: These reports will provide insight into the health of the housing market, another key sector of the economy.
Navigating the Choppy Waters
The market’s recent volatility reflects the current uncertainty surrounding the economic outlook. Despite the late-week rally, concerns about a potential recession and the unwinding of the yen carry trade persist. Many experts argue that a correction in the S&P 500 is still a real possibility, particularly given the average intrayear drawdown for the index since 1990 has been 14.7%.
However, there is also a growing sense that the market’s overreaction this week could lead to a calmer period ahead. Many experts believe that the Fed’s anticipated rate cuts, coupled with a slowing but not weak economy and a strong consumer with minimal debt, could provide a foundation for further growth.
"We think this quarter could be choppy and sort of sideways, as people sort of wrestle with the growth scares and with recession fears, still," said Scott Ladner, Chief Investment Officer at Horizon Investments. "But by the time we get the fourth quarter, we think those things will resolve."
The next few weeks will be critical for market sentiment. Investors will be closely watching the data releases, especially on inflation, the labor market, and consumer spending. The Fed’s actions and communication will also be closely scrutinized, as the central bank navigates the delicate balance between fighting inflation and supporting economic growth.
