It is a big week. More than a third of companies in the S&P 500 will be releasing their Q2 earnings reports during this period, including many large tech names. In addition, the Fed's July meeting is expected to raise rates by another 75 basis points, and traders will focus on getting hints in the September meeting. The U.S. GDP and the Chinese PMI data will also give the markets more clues about the outlooks of the two largest economies.

Hopes for "bottom formed" are rising, but we think it is too early to draw this conclusion as there is little evidence of inflation, the Fed, or growth outlook. Recent drops in commodities are mainly driven by recession trade, not an improvement in supply conditions.

The new BA 5 variant drove the surge in Covid infections recently and added to the potential risk of supply chain shortages. There is no quick fix to the supply chain shortage, and the American Express earnings report shows that consumer demands remain high. In the next six months at least, inflation in the United States is likely to remain above 8%, and the Fed still has more work to do.

For the Fed meeting this week, a 75bps hike is almost confirmed, but the rating outlook for September is not. The key this week is whether Powell will provide any hints about slowing the pace of hiking in September, but we doubt he will. With that in mind, market volatility is unlikely to ease as traders need to wait another month for the Jackson Hole event.

The inflation outlook remains uncomfortable, and the Fed is expected to gradually abandon forward guidance, which means that the size of rate increases will largely depend on inflation readings for July and August.

Our base case scenario is that the Fed fund rate could be around 3.75% by the end of the year. That said, the US Treasury curve is likely to remain inverted for the rest of the year, making recession risk an ongoing concern.

Second-quarter gross domestic product will be released on Thursday. The Fed’s preferred personal consumption expenditures inflation data comes out on Friday morning, as does the Employment Cost Index. Home prices and new home sales are reported on Tuesday, and Consumer Sentiment Index is released Friday.

On the earnings side, what those bigger companies say about the outlook will be more important than the earnings they post. Combined with the statistical reports, which will be backwards-looking, it is going to be a volatile and important week.

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Fullerton Markets Research Team
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