Summer Vacation Ends Early: Pivotal Week Of Inflation Data, Bank Earnings On The Way

(Monday market open) A vital week on Wall Street packed with summer fireworks begins quietly today with investors bracing for fresh inflation data Wednesday and big bank earnings Friday. Enjoy the peace while it lasts.

The first week of earnings season gets underway with the S&P 500® Index (SPX) up 7% since the start of the previous earnings season in April, but analysts expect a 7.2% drop in year-over-year earnings per share (EPS) for Q2, according to FactSet. Forward valuations (price-earnings) are high on a historical basis near 19, but the bar is low for companies to exceed Wall Street’s forecasts.

Last week, the SPX fell 1.2%—only the second weekly decline in the past two months. The Nasdaq Composite (COMP) lost 0.9% for the week. Energy shares enjoyed the best performance on Friday thanks to a rise in crude oil prices fueled by investor enthusiasm for potential production cuts by OPEC. Volume remained below normal Friday on the New York Stock Exchange, continuing a trend of light trading, and advancers led decliners despite major indexes losing ground.

Industrial stocks like Caterpillar CAT and 3M MMM also wrapped up the week on a high note, and the materials sector topped Friday’s scorecard. This could be more evidence of widening participation in the rally beyond info tech, so consider keeping an eye on these sectors. As for mega-cap info tech, selling pressure surfaced late Friday, likely explaining the market’s decline over the last hour of trading.

Friday’s close looked weak from a chart standpoint, as the SPX was unable to hold 4,400. Stocks have a mixed tone this morning as mega-cap weakness persisted. It’s also worth watching crude oil futures (/CL), which posted nine-week highs Friday after Saudi Arabia’s most recent slice to production. Rising crude can support the energy sector, but it may put a brake on the recent rally in transport-related companies like airlines, railroads, and delivery firms.

Morning rush

• The 10-year Treasury note yield (TNX) is steady at 4.04%.
• The U.S. Dollar Index ($DXY) slipped to 102.43.
• Cboe Volatility Index® (VIX) futures climbed to 15.36.
• WTI Crude Oil (/CL) was steady at $73.41 per barrel. 

Eye on the Fed

Futures trading indicates a 92% probability that the Federal Open Market Committee (FOMC) will raise interest rates by 25 basis points at its July meeting, according to the CME FedWatch Tool. That’s basically unchanged from late last week.

This week features a packed calendar of Fed speakers, including three today. Among them is Atlanta Fed President Raphael Bostic, whose remarks might be worth a close look. He’s one of the few Fed officials who has sounded slightly less hawkish lately.

Jobs report redux: Last Friday’s Nonfarm Payrolls report got a mixed review from analysts, and the market didn’t seem to know what to do with it. Major indexes traded in mixed fashion following the data. The bond market got a bit of a reprieve from the cooler-than-expected June jobs growth of 209,000, but it was still a strong report by historical standards.

Jobs growth of 200,000 and above is far more than the economy needs to keep supplying workers with labor. About 100,000 new jobs a month would do the trick, economists say. The trend in jobs growth is lower this year, however, and June was the lightest month since late 2020. Much of the increase was in the government sector, which tends to lag in the business cycle. Wage growth that came in above expectations kept the inflation alarms ringing, 

What to Watch

Inflation on deck: The U.S. government’s June Consumer Price Index (CPI) and Producer Price Index (PPI) loom this Wednesday and Thursday, respectively. These two reports outshine all others this week now that Friday’s Nonfarm Payrolls is behind us.

Early analyst consensus on Wall Street is for a 0.3% rise in both CPI and core CPI, according to Trading Economics. CPI rose 0.1% in May, while core CPI, which strips out volatile food and energy, rose 0.4%. It’s arguably unlikely the reports would affect the Fed’s rate strategy, as it seems determined to raise rates another 25 basis points at the next meeting in late July. Both CPI and PPI have been trending lower—just not as quickly as the Fed might want to reach its 2% inflation objective.

Stocks in Spotlight

Four of the five leading stocks in the Dow Jones Industrial Average ($DJI) year-to-date were associated with the info tech industry. The fifth is American Express AXP. Placing sixth is Visa V. That says a lot about the financial services industry, which includes companies that offer payment cards. American Express reports two weeks from today, following Q1 earnings that missed analysts’ expectations. PayPal PYPL is expected to report in early August. Investors might want to pay close attention to guidance from the payment industry to see if executives forecast any sort of consumer or business slump in the second half of the trading year.

Amazon AMZN holds its “Prime Day” on Tuesday and Wednesday, a good chance to see how the consumer is doing.

Halftime for bonds: Corporate bonds generally had a good first half in 2023, and the picture remains bright for the remainder of the year, according to Schwab’s mid-year outlook on corporate bonds. One thing to watch is volatility, which may increase in the high-yield arena.

CHART OF THE DAY:  CRUDE DOWNTREND THREATENED. Generally, crude oil (/CL—candlesticks) has been in a bearish trend the last nine months, with lower highs and lower lows. The most recent upward swing threatens that trend, with front-month futures recently clawing back above their 50-day moving average (blue line). To really inject a more bullish feeling, prices would arguably have to push past $77 per barrel, which is where the downward trendline (red line) from last fall’s highs currently rests. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Bank counter: The biggest U.S. banks begin reporting Q2 earnings this coming Friday when JPMorgan Chase JPM, Citigroup C, and Wells Fargo WFC share results, and they have a long history of exceeding Wall Street’s expectations. It happened again last quarter and injected vigor into the early days of Q1 earnings season. Even so, there are reasons to wonder if that’s going to be the case in Q2, especially considering that analysts have pared their earnings per share (EPS) expectations for the financials sector over the last three months, according to FactSet. The sector’s EPS grew 5% year-over-year in Q1 despite a slight fall in profit margins. Analysts expect sector EPS growth of 5.3% in Q2, down from the March 31 average of 8.4%. Of course, financials includes more than just banks, and all five financials sub-industries are seen reporting EPS growth, led by consumer finance (15%) and banks (14%), FactSet said. Year-over-year earnings per share and revenue are seen rising at five of the six largest U.S. banks in Q2, still driven partly by gains in net-interest income.

Taking off: Airlines also step to the plate this week, with Delta DAL number one on the runway Thursday. The company already delivered a bullish preview late last month, predicting a solid summer travel season—and the highest Q2 earnings in its history. United Airlines UAL and American Airlines AAL follow next week. People are taking to the skies like never before, with U.S. passenger numbers setting an all-time daily record over the Fourth of July weekend, according to the Transportation Security Administration (TSA). Airline ticket prices are also rising faster than inflation. Meanwhile, in what must feel like a Goldilocks scenario for airlines, crude oil prices are down sharply this year. Much of the heightened travel demand reflects an increase in tourism. However, airlines tend to profit more from business travelers, so listen for updates on that business segment. Also, growing demand forced airlines to hire more workers while operating at capacity even with fewer seats available; both are challenges for the industry as it dealt with weather-related delays and cancelations recently. The AMEX Airline Index (XAI) is up 33% this year, mostly due to a huge January. It’s spent a lot of time on the ground since then.

On sale: Though it’s become “de rigueur” to complain about inflation, there are signs of underlying pressures behind it easing. We’ll obviously learn more later this week from the official U.S. government price data, but The Wall Street Journal noted that soft demand pulled down meat prices last quarter, while global shipments of automotive semiconductor chips and U.S. auto production finally climbed back above prepandemic levels. This might have been reflected in U.S. May new auto sales, where the average new car buyer paid $410 below sticker price, compared with $637 above sticker a year earlier, the newspaper reported. Gargantuan car price jumps associated with the pandemic appear to be easing as supplies revive. Globally, food prices fell again in June to their lowest level in two years, the United Nations Food and Agriculture Organization said Friday. Investors get the latest price check later today with the June Manheim Used Vehicle Value Index, which tracks prices of used vehicles sold at its U.S. wholesale auctions. It declined 2.7% month over month in May.

Calendar

July 11: No major earnings or data

July 12: June Consumer Price Index (CPI), Core Consumer Price Index, and the Fed’s Beige Book

July 13: June Producer Price Index (PPI) and expected earnings from Conagra (CAG), Delta Airlines (DAL), and PepsiCo (PEP)

July 14: University of Michigan July Preliminary Consumer Sentiment and expected earnings from JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC), and UnitedHealth (UNH)

July 17: July Empire State Manufacturing

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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