Important Developments to Follow This Week

The main focus next week will be U.S. inflation data for July, due on Wednesday, after a stronger-than-expected jobs report on Friday dashed hopes that the Fed would abandon its aggressive campaign to control very high inflation. A sign that inflation is still nowhere near its peak could test the recent rally in U.S. stocks. Investors will also be listening to speeches from some Fed officials. Politicians are under pressure again to raise interest rates by a third time, by 75 basis points, when they meet in September. Earnings season is winding down, and U.K. GDP data on Friday could signal the start of a contraction after the Bank of England warned last week that Britain would be in recession for more than a year. Here’s what you need to know to start the week: 1. U.S. inflation data Inflation has been running more than three times the Fed’s 2% target for months, defying expectations that it would slow. Investors will be focused on Wednesday’s CPI figures, with economists expecting the annual inflation rate to ease to 8.7% in July after rising 9.1% in June, the biggest increase since 1981. But the core CPI is expected to rise 0.5% on the month, bringing the annual rate to 6.1% from 5.9% in June, underscoring the Fed’s challenges as it tries to bring inflation back to its target. The July PPI figures and the weekly initial jobless claims report are due on Thursday, followed by the University of Michigan’s consumer sentiment index on Friday. 2. Fed speakers Chicago Fed President Charles Evans, Minneapolis Fed President Neel Kashkari and San Francisco Fed President Mary Daly are set to speak next week and their statements will be closely watched. The key question for investors now is whether the Fed will “impose a third 75 basis point hike next month or ease the pace.” The strength of the labor market is a double-edged sword for the Fed — it can continue to raise rates to combat inflation without causing a big spike in unemployment, but the labor market will need to cool to help ease price pressures. Fed Governor Michelle Bowman echoed other Fed officials in saying on Saturday that the Fed should consider another 75 basis point hike to bring inflation in line with its target. 3. U.S. stock rally put to the test The rally in U.S. stocks could be put to the test next week, as Wednesday’s inflation data could undercut hopes that the Fed, which has hiked interest rates 225 basis points so far this year, will make a dovish shift. The S&P 500 and the Nasdaq ended July with their biggest monthly percentage gains since 2020, partly on hopes that the Fed will backpedal on its aggressive campaign to curb inflation. Whether the increases continue could depend on whether investors believe the Fed is succeeding in its fight against inflation. Signs that inflation has yet to peak could send stocks lower, tempering expectations that the central bank will hold off on raising interest rates early next year. “We’re at a point where consumer price data is reaching a Super Bowl level of significance,” Michael Antonelli, managing director and chief market strategist at Baird, told Reuters. “That gives us a sense of what we’re facing and what the Fed is facing.” 4. Earnings reports Markets have been through most of the second-quarter reporting period, and so far U.S. companies have reported mostly upbeat results, surprising investors who had been bracing for a gloomier outlook for both businesses and the economy. About 78% of earnings reports have beaten Wall Street expectations, above the long-run average, according to Reuters. Heading into earnings season, investors had been concerned that earnings estimates for 2022 were too high if high inflation and rising interest rates had pushed the economy to the brink of recession. Disney (NYSE:DIS) is the highest-profile name to report next week, due to report its results after the market closes on Wednesday. Other names due to report throughout the week include Take-Two (NASDAQ:TTWO), Palantir (NYSE:PLTR), Wynn Resorts (NASDAQ:WYNN), Six Flags (NYSE:SIX) and travel stocks Norwegian Cruise Line (NYSE:NCLH) and Spirit Airlines (NYSE:SAVE). 5. U.K. GDP figures June and second-quarter GDP figures are expected to be released Friday, after the Bank of England warned last week that it expected the economy to enter a 15-month recession this year. However, the National Institute for Economic and Social Research believes a recession could begin this quarter. The BoE said consumer price inflation could peak at 13.3% in October, the highest since 1980, due to rising energy costs following Russia’s invasion of Ukraine and adjustment to Brexit. The bank has raised interest rates six times since December.