Welcome back to The Week Ahead, if you’ve been following our recent discussions, you’ll know there’s a whirlwind of excitement brewing. Let’s touch on the S&P 500 for a moment. Even with its recent dance downwards, it’s still soaring with a commendable year-to-date increase. Impressive, isn’t it? And while we’re in the number-crunching mood, there’s some uplifting news on the US economic front. The vibe I’m getting? A gentle, yet optimistic economic descent in the horizon. Growth is taking its sweet time, but it’s staying in the green, and that’s the silver lining!
Now, onto inflation. It might seem like a daunting word, but the future’s looking like a gradual ease. So, deep breaths all around. And for those with an eagle eye on the Federal Reserve’s maneuvers, there’s a bit of a shuffle expected. But overall, things are shaping up nicely.
As we gear up to navigate the week ahead, let’s remember to find opportunities in every twist and turn. Stay connected for more insights, and always, let’s keep that optimism burning bright!
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The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
Data in the Week Ahead:
- The spotlight for the upcoming week will be on Retail Sales. Retail sales data provides a measure of the total receipts of retail stores and offers insights into consumer spending patterns. Changes in retail sales can be used to gauge the economic health of the consumer sector, with increases indicating confident consumers willing to spend, and decreases suggesting the opposite.
- Another key data point to be released is Industrial Production. This metric measures the total production of factories, mines, and utilities within a country. It’s a significant indicator of the state of the industry and manufacturing sectors. A rise in industrial production can signal economic growth and potential inflationary pressures, while a decline might indicate a slowing economy.
- Housing Data will also be in focus, with specific metrics such as:
- Housing Starts: This data represents the number of new residential construction projects that have begun during a particular month. It’s a leading indicator of economic health because new home construction leads to employment and income growth. A high number of housing starts can indicate a buoyant economy, while a drop can suggest a downturn.
- Building Permits: This metric provides the number of new building permits issued by the government. It’s a precursor to housing starts, indicating future construction activity. A rise in building permits can signal confidence in the housing market, while a decline might suggest caution among builders.
- Additionally, the Import Price Index will be released. This index measures the cost of goods purchased from abroad. Changes in import prices can affect domestic inflation rates, with rising import prices potentially leading to higher consumer prices.
These upcoming data announcements will be crucial in shaping the understanding of the U.S. economic landscape for the week and will be closely watched by policymakers, investors, and analysts alike.
Macro Market
Growth
I’ve adjusted my perspective on the US economy, now leaning towards a soft landing. I anticipate that growth will dip below the trend in 2024 but will stay positive throughout my forecast period. My projections for US GDP growth are 2.0% (4Q/4Q) for this year, 0.7% in 2024, and 1.8% in 2025. This represents an increase of approximately 0.5pp for 2023 and 0.7pp for 2024 compared to my earlier estimates.
Inflation
I now predict PCE inflation to decrease to 2.0% y/y in the second half of 2025, which is about two quarters later than my previous mild recession baseline. My forecast for the four-quarter change in core PCE inflation stands at 3.7% in 2023, 2.8% in 2024, and 2.2% in 2025.
Federal Reserve
I’m now forecasting an additional 25bp rate hike in November, leading to a terminal target range of 5.50-5.75%. I anticipate the first rate cut to occur in June 2024, followed by quarterly 25bp reductions in the policy rate. This would mean a total of 75bp of rate cuts in 2024 and 100bp of cuts in 2025.
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Week’s Numbers
S&P 500’s Recent Performance
Jennifer Nash reports that the S&P 500 has recorded its lowest closing in the past month, ending the week 0.31% lower than the previous Friday. This downturn marks the second straight week of losses for the index, a trend not observed since early May. Despite these setbacks, the index has risen 16.73% since the beginning of the year. However, it remains 6.93% beneath its all-time high achieved on January 3, 2022.
Earnings
23Q2 Earnings Overview
For 23Q2, year-over-year (Y/Y) earnings are projected to decline by 3.8%. However, when the energy sector is excluded, the Y/Y earnings growth is anticipated at 2.5%. Out of the 456 S&P 500 companies that have disclosed their 23Q2 earnings so far, a significant 78.7% surpassed analyst expectations. This performance is notably higher than the long-term average of 66.4% and the recent four-quarter average of 73.4%. In the upcoming week starting August 14, 17 more S&P 500 companies are slated to announce their quarterly earnings.
Aggregate Estimates and Revisions
- 23Q2 Y/Y earnings are expected to be -3.8%. Excluding the energy sector, the Y/Y earnings estimate is 2.5%.
- Of the 456 companies in the S&P 500 that have reported earnings to date for 23Q2, 78.7% have reported earnings above analyst estimates. This compares to a long-term average of 66.4% and prior four quarter average of 73.4%.
- During the week of August. 14, 17 S&P 500 companies are expected to report quarterly earnings.
Source I/B/E/S data from Refinitiv
Global Spotlight
Argentine Election Preview
On August 13, Argentina is set to conduct primary elections, a precursor to the presidential and legislative elections slated for October 22. These primaries, where voting is compulsory, often provide a glimpse into potential electoral outcomes. Given the prevailing economic uncertainty in Argentina, market players and households will be closely watching the results, ready to react if they perceive their assets to be at risk.
ECOWAS’ Niger Dilemma
In the coming week, the Economic Community of West African States (ECOWAS) will convene to discuss the potential for military intervention in Niger, aiming to restore President Mohamed Bazoum to power. Although ECOWAS has signaled its readiness by activating its standby force on August 10, a commitment to military action remains uncertain. The situation in Niger is complex, with factors like military factionalism, varying levels of support from France and the U.S., and potential involvement from the Wagner Group. If ECOWAS receives backing from certain Nigerien military factions, a swift and relatively peaceful intervention could be possible. However, there’s also the risk of a protracted conflict that could escalate into a broader regional crisis.
Polish Referendum Decisions
Between August 16 and 17, Poland’s lower house of parliament will deliberate on legislation related to organizing referendums on state-owned company privatization and an EU migration agreement. Deputy Prime Minister and leader of the ruling Law and Justice party, Jaroslaw Kaczynski, has already announced two out of a potential four referendums. These referendums will coincide with the parliamentary elections on October 15. Given the tight race and the ruling party’s waning popularity due to economic challenges and a resurgent opposition, consolidating the voting dates might be a strategic move to galvanize nationalist and right-leaning voters.
China’s Military Posturing
From August 12 to 14, China plans to hold military exercises in the East China Sea. This move is likely a reaction to the visits of Taiwan’s vice president and top presidential contender, William Lai, to the U.S. on August 12-13 and 16-17. While Lai’s itinerary doesn’t include meetings with senior U.S. officials, any change to this could prompt China to intensify or prolong its military drills. Such actions might bolster Lai’s standing among Taiwanese voters, given his current 10-point lead in polls. If Lai emerges victorious, China is expected to maintain, if not escalate, its aggressive military stance towards Taiwan, potentially leading to increased tensions in key global shipping routes.
Stratfor.com
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