Market Highlights for the Week: Inflation, Earnings, Oil

A busy week awaits the markets, with US inflation data that could cement expectations of a rate cut in September. Earnings season gathers momentum with the release of the results of major companies and many European banks. Meanwhile, Eurozone PMI data will highlight the run-up to the European Central Bank’s next rate cut. Here’s what will happen in the markets in this week.

US inflation data

Friday’s US inflation data will test market expectations that the Federal Reserve is almost certain to cut interest rates in September.  June’s personal consumption expenditures (PCE) price index is estimated to have risen 0.1 percent for the second month in a row, which would put three-month annualized core inflation at the slowest pace this year, below the Fed’s 2 percent target.

The consumer price index declined in June for the first time in four years. This more moderate-than-expected report triggered a rotation in equities and strengthened market expectations that the Fed is ready to cut rates in September. A few days after the CPI, Fed Chairman Jerome Powell said that the second quarter inflation readings “somewhat increase confidence” that the pace of price increases is returning to the Fed’s target on a durable basis.

Earnings season reaches its peak

With earnings season in full swing, optimistic investors are hoping that strong corporate results will stem the decline in technology stocks, which has halted this year’s US stock rally.  The S&P 500 tech sector is down nearly 6% in just over a week, as rising expectations of interest rate cuts and a second Donald Trump presidency divert money from this year’s winners to sectors that have languished in 2024.

Second-quarter earnings may help technology companies regain focus. Tesla (TSLA) and Google parent Alphabet (GOOGL) release their results on Tuesday, kicking off the group of “Magnificent Seven” mega-caps that have led markets since early 2023.  IBM (IBM), Ford (F), and General Motors (GM) are among other large companies releasing results later this week, and investors are eager to hear the companies’ views on consumer strength and expectations for future economic growth.

European bank results

This week, the European banking sector, which has enjoyed a run of rising profits and stock prices, will be given a reality check with the start of the second quarter earnings season. 

The main trump card is net interest income, which has risen as a result of rate hikes. However, the party could be short-lived as the ECB plans further rate cuts and the Bank of England is set to ease monetary policy.

Investors will also want to see how lenders fare as political uncertainty intensifies; French bank stocks fell sharply during the recent election. 

This Wednesday will see the release of results from big names such as Deutsche Bank (DBK) (Germany), Lloyds Banking Group (LON) (UK), BNP Paribas (BNP) (France), Banco Santander (SAN) (Spain), and UniCredit (UCG) (Italy).

Analysts note that the reading from US companies that have already reported is that higher investment banking revenues should boost lenders with large investment banking arms, such as Deutsche Bank and Switzerland’s UBS (UBS), but any disappointment in interest income figures could generate negative market reactions.

Eurozone PMI

Although Eurozone economic growth remains sluggish, the strength of the dominant services sector, driven by tourism, has allowed price pressures to remain at uncomfortably high levels.  This has presented a challenge for the ECB, so Wednesday’s PMI data will be closely watched after the central bank held interest rates at 3.75% last Thursday and resisted giving guidance, saying it was data-dependent.

The ECB, which in June cut borrowing costs for the first time in five years, sees inflation moderating.  Markets are betting heavily on a rate cut in September, supporting eurozone equities, government bonds, and the euro for now, but also raising the threat level of any PMI results that might change the ECB’s view.

Oil prices

Oil prices settled at their lowest level since mid-June on Friday as investors monitored a possible ceasefire in Gaza, while the strength of the dollar also weighed.  The war in Gaza has caused investors to apply a risk premium when trading oil, as tensions threaten global supplies.

If a ceasefire is reached, the Iranian-backed Houthi rebels could ease their attacks on commercial vessels in the Red Sea, as the group claimed the attacks were in support of Hamas.  Meanwhile, the US dollar index rose after better-than-expected economic data, pressuring oil prices.  The strengthening of the US currency reduces demand for dollar-denominated oil from buyers holding other currencies.