Stocks are at record highs, but the market will face its moment of truth in a busy week ahead.
Despite recent signs of a solid U.S. economy, the Federal Reserve is expected to cut short-term interest rates for the first time in over a decade this week. The Federal Open Market Committee (FOMC) kicks off its two-day policy meeting Tuesday, and Chairman Powell will hold a press conference on Wednesday following the policy decision.
Consensus among economists is that the Fed will cut interest rates the upcoming meeting, even though recent economic data has signaled a strong economy.
“We expect the FOMC to cut its target rates by 25bp at the July meeting, lowering the target range for the federal funds rate to 2.00-2.25%,” Nomura wrote in a note Thursday. “The strengthening of recent data and comments from FOMC participants generally support a 25bp cut next week, as opposed to 50bp. We do not believe the economy is on the brink of a recession.”
Though a 25 basis point cut is what most economists expect, some have still not ruled out the possibility of a 50 basis point cut next week. “We maintain our call for a cut 50 bps on communication, not data. The June FOMC shifted our Fed view a lot, UBS wrote in a note Wednesday. “Chair Powell clearly wants to cut rates; in public comments, he and the core of the FOMC have ignored or downplayed strong data and highlighted weak data.”
Even though the GDP data released Friday was stronger-than-expected, it likely reinforced the Fed’s decision to cut interest rates. “What does this all mean for the Fed? Support for the cut,” Bank of America Merrill Lynch said in a note Friday. “The recent data and revisions showed growth momentum to be weaker, particularly investment which they are most worried about, and core PCE inflation is a touch softer.”
Following the GDP data, market watchers will get a pulse on the U.S. labor market when the July jobs report is released Friday. Economists surveyed by Bloomberg expect the U.S. economy to have added 170,000 nonfarm payrolls during the month, down from 224,000 jobs added in June. The unemployment rate is anticipated to have remained steady at 3.7%.
“Both our official forecast and the private payrolls tracker suggests some deceleration in hiring activity in July compared to June when nonfarm payrolls grew by 224k and implies that the trend in hiring has softened in the past several months,” Bank of America said. “Indeed, if our forecast proves true, the 3-month moving average in nonfarm payroll employment growth would slow to 155k in July from 171k in June.”
The jobs data will also play a crucial role for the Fed, as it looks to potentially cut rates additionally this year.
Meanwhile, earnings season is raging on. Just over 40% of the S&P 500 companies have released results so far, and this week, another third of S&P is expected to release results. So far, earnings season has been better-than-expected and thus big reports scheduled for this week will carry extra weight.
Investors will be focused on reports from Beyond Meat, Apple, Procter & Gamble, Under Armour, AMD, GE, Dunkin, Qualcomm, Square, Chevron and Exxon Mobil.
In addition, trade will be back in the spotlight this week as representatives from both the U.S. and China get together for the first time in two months.
Tuesday: Altria (MO), ConocoPhillips (COP), D.R. Horton (DHI), Eli Lilly (LLY), Grubhub (GRUB), Incyte (INCY), Mastercard (MA), Merck (MRK), Pfizer (PFE), Procter & Gamble (PG), Ralph Lauren (RL), Under Armour (UAA) before market open; Advanced Micro Devices (AMD), Amgen (AMGN), Apple (AAPL), Electronic Arts (EA), Gilead (GILD), Mondelez (MDLZ) after market close
Wednesday: Credit Suisse (CS), Dine Brands (DIN), Fiat Chrysler (FCAU), General Electric (GE), Humana (HUM), Molson Coors (TAP), Spotify (SPOT) before market open; Qualcomm (QCOM), The Cheesecake Factory (CAKE), Twilio (TWLO) after market close
Thursday: Cigna (CI), Clorox (CLX), Crocs (CROX), Dunkin Brands (DNKN), General Motors (GM), Kellogg (K), Marathon Petroleum (MPC), Shopify (SHOP), Sprouts Farmers Market (SFM), Verizon (VZ), Wayfair (W), Wingstop (WING), Yeti (YETI), YUM Brands (YUM) before market open; Aphria (APHA), Pinterest (PINS), Square (SQ), U.S. Steel (X) after market close
Monday: Dallas Fed Manufacturing Activity, July (-5.0 expected, -12.1 prior)
Tuesday: Personal Income, June (0.4% expected, 0.5% prior); Personal Spending, June (0.3% expected, 0.4% prior); Conference Board Consumer Confidence, July (125.0 expected, 121.5 prior)
Wednesday: MBA Mortgage Application, week ended July 26 (-1.9% prior); ADP Employment Change, July (150,000 expected, 102,000 prior); Employment Cost Index, Q2 (0.7% expected, 0.7% prior); MNI Chicago PMI, July (51.0 expected, 49.7 prior)
Thursday: Initial Jobless Claims, week ended July 27 (212,000 expected, 206,000 prior); Continuing Claims, week ended July 20 (1.676 million prior); Bloomberg Consumer Comfort, week ended July 28 (63.7 prior); Markit U.S. Manufacturing PMI, July (50.0 prior); ISM Manufacturing, July (52.0 expected, 51.7 prior); ISM Prices Paid, July (49.0 expected, 47.9 prior); Construction Spending month-on-month, June (0.4% expected, -0.8% prior)
Friday: Change in Nonfarm Payrolls, July (170,000 expected, 224,000 prior); Change in Manufacturing Payrolls, July (3,000 expected, 17,000 prior); Unemployment Rate, July (3.7% expected, 3.7% prior); Trade Balance, June (-$54.6 billion expected, -$55.5 billion prior); Factory Orders, June (0.7% expected, -0.7% prior); Durable Goods Orders, June (2.0% prior); University of Michigan Sentiment, July (98.5 expected, 98.4 prior)
Heidi Chung is a reporter at Yahoo Finance. Follow her on Twitter: @heidi_chung.
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