KEY POINTS: Despite high corporate profits, the S&P 500 is falling as investors battle with inflation and COVID-19 fears. On Friday, the focus will be on results, however vital economic data from the United States will also be reviewed. Consumer mood and retail sales may provide some insight into the level of household spending and confidence in the economy.
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Most popular: S&P 500, Dow Jones Industrial Average, and Nasdaq 100 Technical Prognosis for the Next Few Days Even if most company profits at the outset of the earnings season have exceeded expectations, the S&P 500 fell 0.3 percent to 4,360 at the New York close on Thursday. In this regard, the minor pullback appears to be a typical “buy the rumor, sell the news” type of event in the midst of stretched valuations as investors deal with increased inflation and COVID-19 concerns, all while monitoring the Fed’s next monetary policy moves with bated breath. Corporate profits will continue to command the majority of attention over the next several weeks, and they may set the tone for near-term direction, though macroeconomic data will also be important for equity markets. Traders will be watching U.S. retail sales and the consumer sentiment survey attentively on Friday to gauge the strength of household spending and confidence levels. DailyFX Economic Calendar is the source of this information. The US Census Bureau will reveal Advance June retail sales at 8:30 a.m. ET. Following a huge drop of 1.3 percent in May, analysts estimate a monthly decline of 0.4 percent. Despite the reopening of the economy, macroeconomic reports such as manufacturing production and services activity have recently shown signs of cooling, so now is a good time to see if the slowdown is becoming more widespread or if consumers are starting to spend more actively excess savings accumulated during the lockdown. Investors pay close attention to the retail sales index since personal spending accounts for roughly 70% of GDP, even though the data does not represent a big portion of the consumer’s wallet (services, etc.). In any event, the Census report frequently provides general insights about spending trends and indirectly assesses economic optimism (e.g., consumers may be reluctant to purchase durable goods such as cars and major appliances if the economic outlook is bleak). In terms of monetary policy, if retail sales statistics are weak (but not too weak), the Federal Reserve may have more cover to be cautious and postpone its tapering announcement until later in the year. The prospect of a pause in monetary tightening might enhance risk sentiment and markets. Overall, market indices like the S&P 500 and Nasdaq 100 should gain from the Fed’s accommodative-for-longer policy. On the other hand, if retail sales data heats up with pent-up demand, the case for delaying stimulus withdrawal will likely weaken, putting pressure on risk assets in the near term. A robust consumer, on the other hand, is good for profits prospects and, thus, generally positive for equities in the medium to long term. The University of Michigan will release its preliminary July consumer sentiment survey at 10:30 a.m. ET. The measure is expected to grow to 86.5 from 85.5 in June, according to investors. Any increase in confidence should be considered as a good factor in the post-pandemic recovery process, since it could indicate healthy household expenditure. In light of growing consumer prices, traders should keep an eye on inflation predictions, according to the research. Long-term CPI expectations could become unanchored if this signal rises swiftly, forcing the Fed to act and decrease stimulus faster than market participants expected. TRADER TOOLS FOR THE S&P 500 DAILY CHARTEDARE YOU JUST GETTING STARTED? Download our FX trader’s handbook for beginners. Would you like to learn more about yourself as a trader? Take our quiz to learn how IG’s client positioning data can help you understand market sentiment. Here’s where you can get a free guide on how to use this strong trading indicator. For weekly market updates and incisive analysis, sign up for the DailyFX Newsletter. —- Diego Colman, DailyFX Market Strategist, wrote this article. @DColmanFX is my Twitter handle./n
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