Big Week for Data - Ahead of Wall Street

Monday, August 3, 2015

The major indexes are indicated to start today’s first session of August effectively flat, with this morning’s personal income and spending report coming essentially in-line with expectations. We have a busy economic docket the rest of this week that will help frame the market’s Fed expectations.

Economic data coming out this week will have a strong bearing on whether the Fed will use the September meeting to start raising rates or wait til the last FOMC meeting in December to do so. This week’s data obviously isn’t the only set of data between now and the September 16-17 meeting – there will be another set of monthly numbers at the start of September as well.

The key readings will be jobs and inflation. The Fed is satisfied with what is happening in the job market and as long as this Friday’s reading and the one in early September are broadly in-line with the trend we have been seeing in recent months, then they will have no reason to hold back on the labor market account.

With respect to inflation, the Fed is looking for a 2% reading on its preferred measure of inflation, which is the year over year change in the core PCE Price Index. This morning’s June Personal Income & Outlays report showed this measure at 1.3%, the same level where it has been for the last few months. On face value, one could reasonably argue that this lack of pricing pressure should prompt the Fed to hold off on starting the tightening process. But that may not be an accurate read on thinking within the FOMC as it is most likely OK with starting the process as long as inflation readings aren’t going down. Looked at that way, if the July core PCE price index reading coming out in early September comes at 1.3% or higher, the Fed will be satisfied with it.  
 
Beyond these economic readings, this week is the last major reporting week of the Q2 earnings season, with almost 1200 companies reporting results, including 90 S&P 500 members. By the end of this week, we will have seen Q2 results from 88% of the S&P 500 members. It has been an overall weak reporting cycle, with growth non-existent, companies struggling to meet top-line estimates and guidance continuing to be on the weak side. The weak guidance is prompting estimates for the current period to come down, with total earnings for the S&P 500 index now expected to be down -4.2% from the same period last year.
 
Sheraz Mian
Director of Research
 
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