Market Analysis, Week of July 29. What to expect, how to trade
The week of July 29th will be pivotal for the stock market, as several macro-economic catalysts in Europe and the USA are anticipated to influence market movements. Below, we share our insights, market analysis and expectations for the upcoming week.
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Watching the macroeconomic events, which could move the market
For the week of July 29th, 2024, there are some key macroeconomic events that we will closely watch in Europe and the USA:
Europe
GDP Growth Rates:
Reports for major economies including the Eurozone, Germany, France, Italy, and Spain will be released on Tuesday, July 30th.?The Euro Area GDP is expected to expand by 0.3% in Q2. If the European GDP growth rate for the second quarter of 2024 falls below expectations, it is likely to have several impacts on the stock market. Typically, lower-than-expected GDP growth indicates weaker economic performance, which can lead to a decline in investor confidence. This might result in a sell-off in stocks, particularly in sectors closely tied to economic growth, such as manufacturing and consumer goods.
Moreover, weaker GDP growth could also lead to downward revisions in corporate earnings forecasts, further pressuring stock prices. Investors might shift their focus towards safer assets like bonds, leading to a potential rise in bond prices and a corresponding fall in yields.
Market Consensus
The consensus for the European GDP growth rate in 2024 varies slightly among different forecasts.
If the actual GDP growth falls significantly short of these expectations, it could exacerbate market volatility and potentially lead to broader economic concerns, such as reduced consumer spending and business investment.
Inflation Rates:
Inflation data for Spain, Germany, Netherlands, France, Poland, the Euro Area, and Italy will be published.?The annual inflation rate in the Euro Area is anticipated to fall to 2.3%, the lowest in three years. If inflation rates in Europe for the second quarter of 2024 stay flat or even increase, the stock market is likely to react negatively. High or rising inflation typically leads to increased uncertainty and reduced purchasing power, which can affect corporate earnings and consumer spending. This scenario can prompt central banks, such as the European Central Bank (ECB), to maintain high interest rates to combat inflation. Higher interest rates generally lead to higher borrowing costs for companies and consumers, which can slow economic growth and negatively impact stock prices.
According to ECB’s economic bulletin, market-based measures suggest that investors expect inflation to decline further in 2024. If this expectation is contradicted by flat or increasing inflation rates, market sentiment could shift negatively, leading to a potential sell-off in equities.
Latest Market Consensus
The latest market consensus indicates that inflation in Europe is expected to decrease. The ECB projects that headline inflation in the euro area will fall to 2.3% in 2024, compared with 2.7% expected six months ago (ECB). Similarly, the European Commission’s survey indicates that household confidence is recovering as inflation recedes (S&P Global).
However, there are concerns that inflation could turn out higher than anticipated if wages or profits increase more than expected.
Manufacturing PMIs:
Manufacturing Purchasing Managers’ Index (PMI) data for Spain and Italy will be closely monitored. The Manufacturing Purchasing Managers’ Index (PMI) for Spain in Q2 2024 has shown a decline. In June, the PMI fell to 52.3 from 54.0 in May. Despite this decline, the index remains above the 50-point threshold that separates expansion from contraction in the manufacturing sector. The fall was attributed to slower increases in production and new orders, as well as lower business expectations which have dropped below the historical average.
For Italy, the situation appears more challenging. The Manufacturing PMI decreased to 47.3 in April 2024 from 50.4 in March, falling below the market consensus of 50.0. This trend continued into May, with the PMI dropping to a five-month low of 45.6. The decline is attributed to a significant contraction in new orders, reflecting subdued demand in the manufacturing sector.
Recent market consensus shows that Spain’s manufacturing sector, despite a slowdown, continues to expand. In contrast, Italy’s manufacturing sector is contracting, highlighting persistent challenges in demand and production. Therefore, the upcoming data releases for both countries, scheduled for Wednesday and Thursday, will be crucial in determining the direction of European stock markets.
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USA
Federal Reserve Interest Rate Decision:
The Fed is expected to keep the federal funds rate steady at 5.25%-5.50%. The latest consensus for the Federal Reserve’s interest rate decision on July 31, 2024, is that the Fed is expected to hold its interest rates steady at the current range of 5.25%-5.50%. This expectation is based on recent economic data showing resilience and a steady U.S. economy. Analysts predict that the Fed will wait until September to potentially start a series of quarter-point rate cuts.
Nonfarm Payrolls Report:
This report will provide insights into job growth, with the economy likely adding 185,000 jobs this month. Market expectations for the U.S. Nonfarm Payrolls in July 2024 indicate a slowing job growth. Economists predict a softer labor market, with an estimated increase of around 175,000 jobs per month in the second half of the year. This is a slowdown compared to previous months, where June saw an addition of 206,000 jobs, albeit with downward revisions for April and May.
If Nonfarm Payrolls decrease, the stock market could react negatively. Lower-than-expected job growth can signal economic weakness, which might lead to reduced investor confidence and stock prices falling. Historically, a strong jobs report tends to boost the stock market as it indicates a robust economy and potential for higher corporate profits. Conversely, a weak jobs report may trigger concerns about economic growth, leading to a bearish market sentiment.
ISM Manufacturing PMI:
The Institute for Supply Management’s PMI is expected to show the manufacturing sector remained in contraction for a third month. The latest market consensus for the U.S. ISM Manufacturing PMI for July 2024 is 48.8. This indicates a slight contraction in the manufacturing sector, as any reading below 50 suggests contraction. The previous month’s reading was 48.7, showing a consistent trend of weakness in the manufacturing sector.
If the ISM PMI indicates a growing contraction, it generally signals that manufacturing activity is declining. This can lead to a negative stock market reaction because it suggests that corporate profits may decline, and the overall economic outlook is weakening.
Influence on Fed Interest Rate Decision:
A weaker than expected ISM PMI number can influence the Federal Reserve’s interest rate decisions by highlighting economic softening. If the contraction in manufacturing is significant, it may prompt the Fed to consider cutting interest rates by 50 b.p. already in September, to stimulate economic activity. The Fed closely monitors such indicators to gauge the health of the economy. For instance, when the ISM PMI shows a considerable downturn, it increases the likelihood that the Fed may adopt a more accommodative monetary policy to support growth and manage inflation. In this light, the bad ISM PMI numbers could be good for interest rate cut decision for September, which could support the stock market in a short-term.
Consumer Confidence Index: The Conference Board’s Consumer Confidence Index will be released.
S&P Case-Shiller Home Price Index:
This index will provide updates on home prices. The S&P Case-Shiller Home Price Index will be significant for the stock market in the week of July 29th, 2024, primarily because it serves as a key indicator of the health of the U.S. housing market. The index tracks changes in the value of residential real estate across the nation, which can influence investor sentiment and economic forecasts. Given that housing is a major component of the economy, fluctuations in home prices can impact consumer spending, borrowing, and overall economic growth. These factors, in turn, can affect stock market performance.
Recent data shows that U.S. home prices continue to rise despite high mortgage rates. The Case-Shiller Index reported a 6.3% annual increase in home prices as of April 2024. This upward trend in home prices suggests a resilient housing market, which could bolster investor confidence in the broader economy.
Current expectations for the S&P Case-Shiller Home Price Index in July 2024 predict a continued, albeit slower, growth in home prices. The CoreLogic HPI Forecast indicates a 0.7% month-over-month increase from May to June 2024 and a 3% year-over-year rise (CoreLogic). This moderation in price growth suggests that while the housing market remains strong, it might be cooling slightly compared to previous months.
Rich Week for Earnings Reports
The upcoming week is crucial for earnings, both in the size of the companies reporting and the number of names releasing their results. Despite a number of big companies reporting next week, I will focus on the names that have the potential to move the market.
On Tuesday, Microsoft (MSFT) and AMD will report their earnings. Both companies have the potential to significantly impact the Nasdaq, especially if their price directions align. If both MSFT and AMD exceed expectations, we could see a strong rally in the Nasdaq. Conversely, if they miss expectations or provide unimpressive outlook and guidance, this will trigger a negative reaction, we might witness new monthly lows as the AI trade continues to unwind.
Wednesday’s focus will be on Meta (META), Qualcomm (QCOM), and ARM. While not as influential as the MSFT/AMD combo, these companies still have the potential to sway market movements.
On Thursday, all eyes will be on Amazon and Apple, both reporting after the market close. Their results will set the tone for the week’s end and the start of August.
Additionally, several other notable companies such as Coinbase (COIN), Roku (ROKU), First Solar (FSLR), Crocs (CROX), Wayfair (W), and DoorDash (DASH) will also be reporting, making it a busy and eventful week.
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