Federal Reserve Chairwoman’s relatively upbeat testimony earlier in the week seemed to indicate that the Fed will remain on course in hiking interest rates and slowly shrink its balance sheet in the fall. Yellen remained positive on economic prospects including job growth, although cautioned on recent inflation weakness. Continued weakness in inflation could prompt the Fed to raise rates at a slower pace than anticipated.
And that’s just what the data indicated on Friday with Consumer Price Index data year-over-year, as of the end of June, increasing 1.6%, the smallest increase since last October. CPI data has been on a downward trajectory since February when it hit 2.7%.
The chances of a Fed hike in December dropped below 50% to a 47% chance as of Friday morning, according to CME data. 10-year treasury yields dropped about five basis points over the week, closing at 2.333% on Friday.
There was a myriad of corporate earnings released over the last week, with leading financial stocks such as JPMorgan Chase, Wells Fargo and Citigroup beating market expectations. The S&P 500, Down Jones and Nasdaq all closed in positive territory week-over-week.
The week ahead…
- Corporate Earnings will continue to be the focus for participants with 66 of the names within the S&P 500 to expected to release earnings this week, mostly within the tech, healthcare and financial sectors. Companies are expected to produce a blended earnings growth of 8.1% for the second quarter, according to Thomson Reuters estimates. The rebound in oil prices and generally overall strong economic data is partly why earnings expectations remain upbeat.
- While no Fed speakers are scheduled for the upcoming week due to its blackout period, market gurus will be presented with a slew of economic data including: Empire State Manufacturing Survey (Monday), Import and Export Prices (Tuesday), Housing Market Index (Tues.), Housing Starts (Wednesday), Jobless Claims (Thursday) and the Philadelphia Fed Business Outlook Survey (Thurs.).
- Overseas, both the Bank Of Japan and the European Central Bank are scheduled to meet on Thursday. While the BoJ is not expected to make any policy changes, it is expected to raise its economic forecasts, with the exception of its inflation outlook. Macroeconomic factors have generally faired positive in Japan, with GDP growth on the upside and a weaker yen boding well for Japanese exports. The BoJ, however, will have to carefully balance its policies as global central bank policies continue to diverge with the Fed and ECB dialing back their accommodative stances. Governor Kuroda is expected to speak after the meeting.
- Similarly, the market does not expect any policy changes from the ECB with President Draghi speaking at a press conference after the meeting. Market practitioners will keenly wait for any signs of how and when the ECB will scale back its quantitative easing program. Currently, the market expects that the ECB will wait until September before providing any tapering announcements. Finally, the market and the ECB will likely focus on German economic sentiment data (ZEW survey) to gage confidence, which will be released on Tuesday.
