A reading on inflation and the start of second-quarter earnings reports will greet investors after a holiday-shortened week that saw stocks close near record highs.
With job growth slowing, investors will be closely watching the release of June’s Consumer Price Index (CPI) on Thursday as the case builds that the Federal Reserve could be set to cut interest rates in September. Semiannual testimony from Federal Reserve Chair Jerome Powell before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday will also be a key focus for investors.
On the corporate side, Friday morning will see some of America’s largest financial institutions, including JPMorgan (JPM), Wells Fargo (WFC), and Citi (C), kick off the second-quarter earnings season. Results from PepsiCo (PEP) and Delta Air Lines (DAL) will also be in focus earlier in the week.
Last week, the S&P 500 (^GSPC) rose nearly 2% while the Nasdaq Composite (^IXIC) rallied over 3%. Both finished the week at record highs. The Dow Jones Industrial Average (^DJI), which has been a notable laggard all year, gained a more modest 0.5%.
Case for a September Rate Cut Builds
On Friday, the June jobs report showed the US economy added more jobs than expected last month. But economists found several signs of a slowing labor market in the details of the report.
The unemployment rate rose to 4.1%, its highest level since November 2021. Meanwhile, job gains for April and May were revised lower by 111,000, showing the labor market’s robust gains over the past several months weren’t as solid as initially thought.
Several economists believe this print will lead the Federal Reserve to cut interest rates in September.
“The June jobs report showed more signs of cooling in the labor market, with job growth including revisions weaker than expected, the unemployment rate rising, and earnings growth slowing,” Oxford Economics lead US economist Nancy Vanden Houten wrote in a note to clients.
“Federal Reserve officials have become increasingly focused on the downside risks to the labor market and the June data bolster our forecast for the Fed to cut rates in September and at every other meeting thereafter.”
Renaissance Macro’s head of economics Neil Dutta wrote in a note to clients on Friday that the report should “firm up expectations of a September rate cut.”
“Economic conditions are cooling and that makes the trade-offs different for the Fed,” Dutta added, “Powell should use July to set up a September cut.”
As of Friday, investors were pricing in a roughly 75% chance the Fed cuts rates by its September meeting, up from a 64% chance seen the week prior, per the CME’s FedWatch Tool.
With Powell set to give his semiannual testimony on Capitol Hill this week, investors will be closely listening for any hints at policy moves ahead of its July 30-31 meeting.
Price Check
While the labor market’s slowing has added to the case for Fed rate cuts, inflation remains a key factor.
In May, inflation readings showed prices increased at their slowest pace of 2024. Powell remarked last week that those readings “suggest that we are getting back on a disinflationary path.”
The first test for whether that path will continue is set for release on Thursday morning with the June CPI report.
Wall Street economists expect headline inflation rose just 3.1% annually in June, a slowdown from the 3.3% rise seen in May. May’s data was the slowest year-over-year inflation reading since July 2022. Prices are set to rise 0.1% on a month-over-month basis, a slight increase from the flat reading seen in May.
On a “core” basis, which strips out food and energy prices, CPI is forecast to rise 3.4% over last year in June, unchanged from May. Monthly core price increases are expected to clock in at 0.2%.
“We expect the June CPI report to be another confidence builder following the undeniably good May report,” Bank of America US economist Stephen Juneau wrote in a research note previewing the release.
