The third quarter is now beginning in earnest after the Fourth of July holiday period. There are some big unknowns.
One is whether stocks can continue their excellent first half. A lot of that will depend on earnings—big banks such as JPMorgan Chase and Wells Fargo release their results on Friday. Other companies such as Delta Air Lines and PepsiCo will also report in the next few days.
Another question is what’s happening in the economy. The job market has been surprisingly robust all year, but Friday’s data produced the first downside miss on nonfarm payrolls in 15 months. That doesn’t exactly indicate a collapse, but it suggests momentum could be shifting, especially as the past two months’ figures were revised lower.
On Wednesday, there’s a fresh round of inflation figures. Price gains have cooled substantially this year, but as Federal Reserve Chairman Jerome Powell has observed—the fight against inflation is far from over. While the inflation rate is around 4% now, Powell still doesn’t see it getting down to the 2% target until about 2025. The last mile really could be the hardest mile.
Which explains why markets are all but certain the Fed will raise interest rates again on July 26. There’s still uncertainty, however, about its September decision. There is currently just a 22% chance priced in of another quarter-point move, after July’s expected hike, before the third quarter comes to an end. But a long list of Fed speakers this week may change people’s minds. There are two speeches Monday, another two on Wednesday, and another one on Thursday.
It’s now high time for the Fed’s radical tightening of the past year to bite. It may prove to be just a scratch, but it’s also possible the damage could be worse than investors are currently expecting.
—Brian Swint
*** Join Barron’s senior managing editor Lauren R. Rublin and deputy editor Ben Levisohn today at noon when they talk with founder and managing partner of Fairlead Strategies Katie Stockton on the outlook for financial markets, industry sectors, and individual stocks. Sign up here.
Try your hand at this morning’s Barron’s digital jigsaw, which is based on the week’s cover story. For all games, including the daily crossword and sudoku, click here.
***
Yellen Wraps Up China Trip as Biden Heads to NATO Summit
Treasury Secretary Janet Yellen told reporters in Beijing that her weekend discussions with Chinese counterparts were “productive” and put U.S.-China relations on a “surer footing,” though differences remain. The U.S. isn’t seeking to decouple its economy from China’s, she said.
- The U.S. wants greater transparency, fewer misunderstandings, and more open communication with China. She said Washington will listen to Chinese complaints about the U.S.’s curbs on technology exports and their “unintended consequences” on China’s economy.
- Yellen said President Joe Biden’s expected executive order restricting American investment in sensitive Chinese sectors would be narrowly targeted. John Kerry, Biden’s climate envoy, is scheduled to visit China next week to restart talks on global warming.
- While specific policy breakthroughs weren’t achieved, as expected, Yellen spent about 10 hours of talks with Chinese counterparts, including time with Vice Premier He Lifeng, and a short dialogue with Premier Li Qiang.
- Biden headed to London ahead of this week’s 74th NATO summit in Lithuania. His decision to authorize cluster bombs for Ukraine caught criticism on the Sunday talk shows. California Democrat Rep. Barbara Lee said it was “crossing a line,” while Delaware Democrat Sen. Chris Coons said he backed the “tough call.”
What’s Next: Biden is meeting with U.K. Prime Minister Rishi Sunak, and will deliver remarks at the NATO summit on Wednesday night before going to the U.S.-Nordic Leaders’ Summit in Finland to discuss shared regional security objectives and other issues.
—Janet H. Cho
***
China Economic Data Raise Deflation Fears
China’s producer prices fell at their fastest pace in more than seven years in June, while consumer prices were flat, underlining the sluggish nature of the country’s economic recovery.
- Factory-gate prices fell 5.4% from a year earlier in June, compared with a 4.6% decline in May, China’s National Bureau of Statistics said. The country’s consumer price index was flat, after rising 0.2% in May, fueling fears that China could fall into deflation.
- Hong Kong’s Hang Seng Index closed 0.6% higher Monday, as the data raised the probability of further stimulus. Chinese tech stocks also rose on hopes that Beijing’s near-$1 billion fine against Alibaba affiliate Ant Group, announced Friday, may signal the end of a regulatory crackdown on the sector.
- U.S.-listed Alibaba stock jumped 8% Friday as investors cheered a brighter future for Chinese tech, but pointed lower Monday as economic fears mounted.
What’s Next: The data put China on the cusp of consumer deflation and point to a challenging second half of the year for the world’s second-largest economy as its recovery continues to stall.
—Adam Clark and Callum Keown
***
June Consumer Price Index Expected to Cool From May
This week’s major economic data will be focused on inflation, as the Bureau of Labor Statistics publishes the consumer price index for June on Wednesday. Economists are forecasting a 3.1% increase in headline CPI, nearly a percentage-point lower than in May. CPI is at its lowest since March 2021.
- Core CPI, excluding volatile food and energy prices, is expected to rise 5% from the same time last year, the lowest rise in 18 months, from 5.3% in May. Economists think core CPI’s growth could fall to between 3.5% and 4% soon.
- Housing accounts for 40% of the core CPI and nearly 20% of the personal-consumption expenditures price index. Former Fed economist Riccardo Trezzi of consulting firm Underlying Inflation expects housing costs to “decelerate sharply.” Used-car prices are also expected to fall, The Wall Street Journal reported.
- On Wednesday, the Federal Reserve will release its Beige Book, with anecdotal information on current economic conditions in its 12 districts. The report could give investors more insights on inflation, business activity, and consumer spending trends.
- On Thursday, the BLS will release the producer price index for June. The PPI is expected to rise 0.4% from the same time last year, while core PPI is expected to increase 2.5%. PPI saw gains of 1.1% and 2.8%, respectively, in May.
What’s Next: Fed officials are on track to raise interest rates at their July 25-26 meeting after a June pause. If forecasters are right that core inflation will soften this summer, that would weaken the case for a second increase in September, the Journal reported.
—Janet H. Cho and Nicholas Jasinski
***
Airlines Grapple With More Weather-Related Disruptions
Major airlines have another weather-related headache on their hands as heavy rain and severe thunderstorms caused disruptions to flight operations. More than 2,000 flights were canceled Sunday, many of them at York City area airports, according to FlightAware.com.
- More than 500 flights, around 50% of inbound and outbound flights at New York’s LaGuardia Airport were canceled, FlightAware reported. About 30% of flights at Newark Liberty, 20% of flights at John F. Kennedy Airport, 25% of flights at Philadelphia, and 16% of flights at Boston Logan airport were scrapped.
-
Airlines most affected by the storms included
United Airlines,
which canceled 254, or 8% of its daily flights;
American Airlines,
which canceled 6%;
JetBlue Airways,
which canceled 22%; and
Delta Air Lines,
which canceled 4%, FlightAware reported. More than 400 flights were canceled Monday as of 6.30 a.m. Eastern time. - Airlines have been trying to overcome disruptions over the July Fourth weekend, when a record number of travelers made their way through airports. Airfares and hotel demand have been falling, though, for domestic travel. International travel continues to boom.
- A flood watch is expected to continue in the New York City area through today, potentially further disrupting flights. The Northeast is susceptible to flash flooding because of a wet start to the summer and already-saturated ground conditions, NWS meteorologist Adrianna Kremerin said.
What’s Next: The travel site Hopper reports the highest U.S. airfares to Europe in five years, averaging $1,200 for a round trip. Despite that, shares of United, Delta, and American are up more than 40% each. Analysts see Delta stock rising another 19%, and United rising 18%.
—Janet H. Cho
***
Banks to Kick Off Earnings After Analysts Cut Expectations
Big banks begin earnings season this week as analysts’ estimates are down 16% in the past six months. Analysts have been concerned about loan volumes and a sluggish environment for deal making that is weighing on revenue. Comments from bank CEOs could ease some of the pessimism.
-
The
SPDR S&P Bank
exchange-traded fund is down 19% for the year so far, compared with the 14% gain in the S&P 500 and a 31% gain in the tech-heavy Nasdaq. Bank stocks have been beaten down after three large bank failures in the spring. -
JPMorgan Chase
is expected to report earnings per share of $3.96 on revenue of $39 billion. Revenue from its consumer division is expected to rise nearly 50% from last year’s second quarter, which could help to offset weakness in investment banking activity. -
Citigroup
is expected to report earnings per share of $1.37 on revenue of $19 billion, and it is also expected to report a drop in investment banking revenue from the first quarter as the deal slump continued, according to FactSet. -
Wells Fargo
is expected to report earnings per share of $1.18 on revenue of $20 billion. The San Francisco lender announced plans to raise its dividend by 17% starting in the third quarter, to 35 cents a share.
What’s Next: The financial sector is expected to report revenue growth of nearly 8% for the second quarter from last year, the highest growth rate of all 11 S&P sectors, according to FactSet Earnings Insight. Banks are expected to report revenue growth of 14%.
—Liz Moyer
***
MarketWatch Wants to Hear From You
June’s job report showed women making gains in the workforce. When could women again hold the majority of jobs in the U. S.?
A MarketWatch correspondent will answer this question soon. Meanwhile, send any questions you would like answered to [email protected].
***
—Newsletter edited by Liz Moyer, Patrick O’Donnell, Callum Keown
Read the full article here
