The Week Ahead
The week Ahead highlights.: FED Meeting, US GDP, PCE price index well as the Big Tech Earnings
The Federal Reserve and the European Central Bank are both expected to announce rate increases this week, but the Bank of Japan is expected to hold the line. This week will be dominated by central bank meetings. The U.S. stock market surge is nearing a turning point, and oil prices are expected to rise further despite worries about the supply outlook.
Key factors for the wall street week Ahead
Fed Meeting
Federal Reserve officials will meet on Tuesday and Wednesday to decide interest rates. Microsoft, Meta Platforms, and Alphabet, along with Visa, Mastercard, Texas Instruments, Coca Cola Company, McDonald’s, Boeing, AT&T, Verizon, Ford Motor Company, Chevron, and ExxonMobil, report during one of the busiest weeks of earnings season. On Thursday, the advance estimate for second-quarter GDP will be revealed, followed by the Fed’s preferred inflation gauge, the PCE Price Index, on Friday. Home prices and June new and pending sales will be updated.
Stock market test
This week, the Fed may raise rates for the last time in decades, testing a rise in U.S. shares.
After 2022’s steep loss, investors projected increased interest rates to cause a recession and severely harm stocks. Despite the Fed’s inflation gains and investors’ acceptance of a “soft landing,” the U.S. economy is holding up.
Stocks have risen recently on expectations that the Fed is nearing the conclusion of its tightening cycle.
Investors will also focus on tech and growth stock earnings, which have powered markets higher this year. Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) report Tuesday night.
Both IT giants are up substantially year-to-date on hopes that artificial intelligence demand will boost growth.
Big Tech Profits
The focus will be on major tech businesses as next week is one of the busiest of the earnings season. On Tuesday, Microsoft and Alphabet, the parent company of Google, will announce their financial results. Meta Platforms will follow on Wednesday. Visa, Mastercard, Texas Instruments, The Coca-Cola Company, McDonald’s, Boeing, AT&T, Verizon, Ford Motor Company, Chevron, and ExxonMobil are just a few of the numerous publicly traded businesses that have earnings reports due.
FOMC meeting in July
The Federal Open Market Committee (FOMC) of the Federal Reserve will meet for two days beginning on Tuesday. On Wednesday, the FOMC will decide on the interest rate and hold a press conference with Chair Jerome Powell. According to CME Group’s FedWatch Tool, the majority of traders anticipate that the Fed will increase interest rates by 25 basis points (bps), which would be the 11th and final rate increase of the current tightening cycle.
Since March of last year, the Fed has increased its federal funds rate benchmark by 500 basis points in a bid to contain the greatest inflation in more than 40 years. The fed funds rate would rise by 25 basis points to its highest level in 22 years, which is between 5.25% and 5.5%.
GDP data for the second quarter
The Bureau of Economic Analysis (BEA) will release the second quarter’s GDP advance estimate on Thursday. The Conference Board predicts that the U.S. economy grew by 1.1% in the second quarter, beating earlier estimates of 0.6% growth.
Despite the possibility of a significant slowdown in growth in the second half of 2023, Deloitte predicts that the U.S. economy would most likely avoid a recession due to the country’s robust job market and declining inflation.
The Fed’s Favorite Inflation Index
The Personal Consumption Expenditures Price Index (PCE Price Index), the Fed’s favoured inflation indicator, will be made public by the BEA on Friday. According to projections, prices increased by 0.1% last month, at the same rate as in May. Price increases likely experienced a steep decline from 3.8% in May to 2.9% annually, moving in the direction of the Fed’s 2% target. Core prices, which do not include volatile food and energy prices, most likely increased 4.3% from a year ago and by 0.2% from May.
The Consumer Price Index (CPI) does not accurately reflect consumer spending decisions as precisely as the PCE Price Index does, and the CPI is revised less regularly than the PCE Price Index.
DAY WISE GLOBAL EVENTS
Sunday
Spain Elections
On July 23, Spain will elect 350 Congress of Deputies and 208/265 Senate seats. After incumbent PM Sanchez’s PSOE lost heavily in May local elections, elections were called early. Polls show the People’s Party (PP) on 35% or 135 seats and the incumbent Socialist Workers’ Party (PSOE) on 29% or 106 seats. Since no party is on track for a majority, several choices exist. Feijoo’s PP appears to be closest to the 176 majority threshold and may try to form a minority administration, but only if it is near. Alternatives include a minority administration supported by smaller parties or a collaboration with right-wing Vox, though Feijoo has opposed the latter. On the other hand, Incumbent PM Sanchez’s PSOE and Sumar might work together to prevent a right-wing coalition from taking office, although this would require the assistance of several smaller parties, either as a coalition or externally. The election happens amid fiscal planning for the next FY, which is crucial for markets. Thus, the market reaction may be more apparent in the weeks/months after the election and depend on the planning process and its results, particularly the deficit.
Monday
Eurozone PMI
In July, manufacturing PMI is expected to drop to 43.3 from 43.4, services to drop to 51.4 from 52.0, and the composite to drop to 49.6 from 49.9. The preceding report noted that “the eurozone economy ground to a halt at the end of the second quarter, ending a robust sequence of services-led growth seen since the beginning of the year.” Both manufacturing and services dropped. Oxford Economics researchers predict the eurozone composite PMI to fall further below the 50-point level that distinguishes expansion from contraction “based on the declines recorded in earlier sentiment data released this month such as the Sentix and the ZEW indices”. “Taken at face value, this suggests there’s a considerable risk that eurozone GDP will contract in Q3 2023,” the consultancy says. The publication is unlikely to affect Thursday’s ECB rate decision, which will raise the deposit rate by 25bps (see below).
UK PMI
In July, services PMI is predicted to drop to 53.0 from 53.7, manufacturing to 45.9 from 46.5, and composite to 52.2 from 52.8. The preceding study said that “the service sector showed renewed signs of fragility in June as rising interest rates and concerns about the UK economic outlook took their toll on customer demand.” Both manufacturing and services components declined. Investec analysts believe the increasingly hawkish interest rate bets at the start of the month may have “reduced corporate confidence in the economic outlook over the next twelve-months”. Despite downticks for all three metrics, the desk expects the services component to remain in expansionary territory and be “supported by the relatively low level of unemployment in the economy and the still sizable pool of excess savings that households (in the aggregate) have accumulated over the course of the pandemic”. Following the recent sub-forecast inflation print, odds now favour a 25 bps hike (70%) vs. a 50 bps adjustment (30%). A stronger-than-expected outturn could swing things back towards a more 50/50 outcome if the UK economy proves more resilient to rising rates.
Wednesday
FOMC Policy Announcement
At its July meeting, the Fed is projected to raise rates by 25bps to 5.25-5.50%, with traders looking for signs of whether this is the central bank’s last rate hike of the cycle or whether it will raise rates again in line with its expectations. “Market participants are caught in the grips of a Goldilocks narrative as recession fears are once again pushed into the future while inflation suddenly looks vanquished,” says SGH Macro Fedwatcher Tim Duy. Duy adds that if growth hardens in Q3, as incoming statistics suggest, then another raise would remain on the table, but even a temporary period of inflation might sideline the Fed, especially if GDP falls to 1.8% below potential. “The Fed will, however, lean towards pulling off that second rate hike – we should not dismiss that possibility too easily,” Duy writes, “we can easily envision that second hike if growth remains firm, but what we can’t see yet is the data to support an increase in the SEP projected terminal rate in September, although a rebound of inflation could also easily make that happen.”
Australia CPI :
Next week, Australia will announce its Q2 CPI measures and June CPI, hoping to see a further decline in price increases. As a reminder, the previous Q1 reading was mixed as headline inflation topped forecasts with CPI QQ at 1.4% vs. Exp. 1.3% and CPI YY at 7.0% vs. 6.9%, but the headline annual pace slowed from its highest reading since 1990 of 7.8% in the December quarter, and the RBA’s preferred Trimmed Mean and Weighted Median CPI QQ and YY figures were all softer than expected. In Q1, housing prices rose 9.8%, recreation and culture 8.6%, and food and non-alcoholic beverages 8.0%, while the monthly CPI was softer than expected at 5.60% vs. Exp. 6.10% (Prev. 6.80%). However, this remains above the RBA’s 2-3% target zone, which will keep policymakers on their toes with any uptick in pace adding to calls for the central bank to continue hiking.
Thursday
ECB Policy Announcement :
Market pricing and analysts expect the ECB to raise the deposit rate by 25bps to 3.75% again. The GC believes inflation “is projected to remain too high for too long,” prompting President Lagarde to say at the June meeting that the ECB is “not done” raising rates. Since the last meeting, headline inflation has dropped to 5.5% from 6.1%, but super-core inflation rose to 5.5% from 5.3%. With this in mind and Bank officials widely teasing a 25bps boost, the rate decision will likely go unnoticed. Instead, the announcement will emphasize any instructions or suggestions of September tightening. According to Bloomberg, the biggest challenge for policymakers will be avoiding “strong signals of either another hike or a pause” at the September meeting. “Interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary,” the policy statement states. After hawkish GC member Knot suggested that rate increases beyond July are “possible” but “not a certainty,” market pricing for September puts the chance of another 25bps move at around 50/50. President Lagarde should emphasize the Bank’s data-dependence as the Bank will have July and August inflation statistics and its updated macro projections by September.
US GDP:
Q2 GDP is estimated to expand 1.8% Q/Q annualized, down from 2.0% in Q1. Q2 consumer expenditure growth was 1.1%, down from 4.2% in Q1. Credit Suisse attributes this to increasing borrowing costs. Despite falling inflation, durable goods demand declined somewhat. The bank expects net exports to have hurt Q2. Business investment in the quarter supports the bullish case. Though high mortgage rates remain a barrier, home investment’s downturn slowed.
Friday
BOJ Policy Announcement (Fri):
Next week, the Bank of Japan will hold its latest 2-day policy meeting and likely retain rates at -0.1% and YCC to flexibly target 10-year yields at 0% within a +/-50bps target zone. The central bank will also release its latest Outlook Report, which includes Board members’ median forecasts for Real GDP and Core CPI. Press reports have speculated that the BoJ may raise its inflation forecast above the 2% target at the meeting, which could lead to further policy normalisation. Former BoJ Director Hayakawa predicted a yield curve control adjustment this month by lifting the 10yr ceiling to 1.0%. Friday Reuters sources said the Central Bank may maintain its yield control stance at the upcoming meeting. Since the 10-year yield is stable within the 0.50% cap, many policymakers see no immediate need for intervention. Despite this, there is consensus that yield curve management must expire, albeit the time is unknown. Sources said the BoJ is expected to raise core inflation expectations for FY23, while FY24 and FY25 forecasts will remain unchanged. Governor Ueda recently stated that the Bank has been patiently maintaining easy policy and that unless the assumption on the need to sustainably achieve the 2% inflation target changes, the narrative on monetary policy will not change. Ueda previously remarked that responding to an inflation undershoot after a premature rate hike is harder than an overshoot and that they have not modified policy because Japan’s inflation is not sustainable. Deputy Governor Himino said they must guide policy flexibly and the best approach is to maintain ultra-easy monetary policy, while Deputy Governor Uchida said they will maintain YCC to sustain easy monetary conditions and there’s still a long way to go before hiking rates. Household Spending and Machinery Orders have fallen, but the latest BoJ quarterly Tankan survey mostly beat estimates and showed Japanese large manufacturers’ sentiment improving for the first time in seven quarters. The latest inflation figures showed a modest acceleration and stayed above the 2% price target, but the central bank expects inflation to drop in the middle of the fiscal year, so policy will not change.
US PCE:
The Fed’s preferred core PCE price index is forecast to gain 0.2% M/M in June, down from 0.3% in May. According to Capital Economics, the June CPI data, which differed in methodology, showed a modest rise, supporting the idea that core inflation will continue to fall. Used vehicle pricing and other core products prices fell, its analysts say. Core services outside of housing were also slowing. “Although that was largely due to a plunge in airfares, which mainly reflects lower jet fuel prices rather than labour market conditions, it is nevertheless the sector Fed officials are watching most closely as they look for evidence the slowdown in core inflation will continue,” they write.
USA Economic calendar for week
Monday, July 24
- Chicago Fed National Activity Index (Jun)
- S&P Global Composite PMI – Flash Estimate (Jul)
Tuesday, July 25
- S&P Case-Shiller National Home Price Index (May)
- Federal Housing Finance Authority (FHFA)
- House Price Index (May)
- Conference Board (CB)
- Consumer Confidence Index (Jul)
- Richmond Fed Manufacturing Index (Jul)
- Day 1 of July 2023 FOMC Meeting
Wednesday, July 26
- New Home Sales (Jun)
- Day 2 of July 2023 FOMC Meeting; Interest Rate Decision and Press Conference
Thursday, July 27
- U.S. GDP Growth Rate – Advance Estimate (Q2 2023)
- U.S. Goods Trade Balance (Jun)
- Durable Goods Orders (Jun)
- Wholesale Inventories (Jun)
- Retail Inventories Excluding Autos (Jun)
- Kansas City Fed Composite Index (Jul)
- Pending Home Sales (Jun)
Friday, July 28
- Personal Income and Spending (Jun)
- Personal Consumption Expenditures (PCE) Price Index (Jun)
- Michigan Consumer Sentiment Index – Final Reading (Jul)
Global Economic calendar for week
Sunday July23
Spanish Elections
Monday, July 24
EZ/UK/US Flash PMIs (Jul)
Tuesday, July 25
German Ifo Survey (Jul)
NBH Announcement
Richmond Fed (Jul).
Wednesday, July 26
FOMC Announcement
Australian CPI (Jun).
Thursday, July 27
ECB Announcement
US GDP Advance/PCE (Q2).
Friday July 28
BoJ Announcement & Outlook Report
French Flash CPI (Jun)
Spanish Flash CPI (Jun)
EZ Business Confidence Survey (Jul)
US PCE (Jun).
EARNINGS CALENDAR
MONDAY JULY 24
Cadence Design Systems Inc. (CDNS), NXP Semiconductors (NXPI), Ryanair Holdings (RYAAY), Brown & Brown Inc. (BRO), Domino’s Pizza (DPZ), and Crown Holdings Inc. (CCK)
TUESDAY JULY 25
Microsoft (MSFT), Alphabet Inc. (GOOGL; GOOG), Visa (V), Texas Instruments (TXN), Raytheon Technologies (RTX), Verizon Communications (VZ), General Electric (GE), UBS (UBS), 3M Company (MMM), and Ford Motor Company (F)
WEDNESDAY JULY 26
Meta Platforms (META), The Coca-Cola Company (KO), Thermo Fisher Scientific (TMO), Union Pacific Railroad (UNP), Boeing (BA), Automatic Data Processing Inc. (ADP), AT&T (T), Chipotle Mexican Grill (CMG), Stellantis (STLA), and O’Reilly Automotive (ORLY)
THURSDAY JULY 27
Mastercard (MA), AbbVie (ABBV), McDonald’s (MCD), Shell (SHEL), Linde (LIN), Comcast (CMCSA), T-Mobile (TMUS), Intel (INTC), Honeywell International (HON), and S&P Global Inc. (SPGI)
Friday, July 28
ExxonMobil (XOM), Procter & Gamble (PG), Chevron (CVX), AstraZeneca (AZN), Sanofi (SNY), Aon (AON), Colgate-Palmolive (CL), Charter Communications (CHTR), Centene Corp. (CNC), and T-Rowe Price Group (TROW)
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