Financial markets are entering the new trading week amid signs of a traditional summer slowdown, with analysts pointing to the VIX volatility index falling to its lowest level of the year. Despite quieter trading conditions, investors still face a busy calendar of corporate results, economic releases and central-bank developments.
Major U.S. retailers are due to report quarterly earnings, preliminary August business activity figures will provide an early indication of economic momentum, and minutes from the Federal Reserve’s July meeting could offer additional clues about the outlook for interest rates. China’s latest activity figures and a monetary-policy decision from Sweden’s Riksbank will also attract attention.
1. Retail earnings put U.S. consumer strength to the test
The U.S. earnings season is approaching its final stages, with around 85% of S&P 500 companies that have already reported exceeding expectations.
Attention now shifts towards some of America’s largest retailers to determine whether the strong corporate reporting season can continue.
According to LSEG data cited by Reuters, profits among S&P 500 companies have increased 32.7% when paper gains recorded by technology giants Alphabet (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN) are excluded.
Home Depot (NYSE:HD), Target (NYSE:TGT) and Lowe’s (NYSE:LOW) are among the major retailers scheduled to release results.
Walmart will command particular attention when it reports before Thursday’s opening bell. As one of America’s largest retailers, its sales trends and management commentary are frequently viewed as important indicators of household spending, a major contributor to U.S. economic activity.
2. August flash PMIs offer early reading on economic momentum
Investors will also receive preliminary August purchasing managers’ index readings from the U.S. and several other major economies.
Business activity has so far proved relatively resilient despite the energy shock associated with the Iran war and expectations that some central banks could respond to inflationary pressures with higher interest rates.
Deutsche Bank analysts noted that the U.S. composite PMI, which combines manufacturing and services activity, reached its highest level of the year in July.
For August, the S&P Global U.S. services PMI is expected to ease slightly to 53.9, while the manufacturing index is forecast to increase to 54.0.
Readings above 50 indicate that activity is expanding, meaning both sectors are expected to remain in growth territory.
3. China’s industrial slowdown highlights domestic weakness
China’s latest activity figures showed industrial production losing momentum in July as weak domestic demand and rising costs outweighed some of the benefits from resilient overseas demand.
Industrial production increased 4.5% year-on-year, according to data released Monday by the National Bureau of Statistics. That was below expectations for 5% growth and represented a slowdown from June’s 5.3% increase.
Conditions in the manufacturing sector have also weakened, with China’s official manufacturing PMI moving into contraction during July and domestic consumption remaining subdued.
Strong international demand has provided some support, particularly for exports of higher-technology products, limiting the slowdown in industrial output.
However, rising costs caused by disruption to global energy markets and shipping routes are creating another challenge for Chinese manufacturers.
4. Fed minutes could provide clues after rate-hike bets fade
Expectations for another Federal Reserve interest rate increase have declined following softer labour-market indicators and relatively moderate inflation data.
Those expectations could be tested when the Fed publishes minutes from its July policy meeting.
Policymakers left rates unchanged at the meeting, although bond markets experienced considerable volatility afterwards as investors attempted to interpret comments from Fed Chair Kevin Warsh.
Warsh offered little guidance about future policy decisions, saying only that the Fed will “not waver” in its commitment to returning inflation to its 2% target.
With explicit forward guidance limited, investors are expected to examine the minutes closely for indications of how policymakers are balancing inflation risks against the broader economic outlook.
Warsh described the July gathering as a “good family fight,” after three policymakers dissented from the decision to leave rates unchanged and instead supported a 25-basis-point increase.
“Given Chair Warsh has stepped back from offering policy guidance, the minutes may shed extra light on how the Fed is weighing inflation risks as well as their urgency to act should those risks remain elevated,” Deutsche Bank analysts said.
5. Riksbank expected to keep Swedish rates unchanged
Outside the U.S., Sweden’s Riksbank is expected to leave interest rates unchanged on Thursday for an eighth consecutive meeting.
The Swedish central bank has adopted a less urgent approach to potential inflation pressures arising from the Iran war than some of its European counterparts.
The European Central Bank increased rates in June before keeping them unchanged the following month, while the Riksbank has had less need to respond aggressively.
Inflationary pressures in Sweden have been comparatively contained, helped by the country’s largely fossil-free energy system, temporary tax reductions and a stronger Swedish currency, according to Reuters.
However, investors continue to monitor whether an earlier rise in producer prices could eventually feed through into consumer inflation.
A Riksbank survey indicated that businesses expect only modest price increases, providing some support for expectations that policymakers can continue holding rates steady.