Eventful week for stocks leaves markets ‘on edge’ ahead of busy week of economic data

Last week, the S&P 500 (^GSPC) posted both its worst and best daily performances of the year.

A sign to some on Wall Street that all is not well in the markets right now.

On Monday, growing fears of a recession, combined with a wave of foreign selling, triggered a spike in volatility and sent stocks lower, with the S&P 500 falling 3%.

On Thursday, stocks posted their best one-day gain since 2022, rising 2.3% as the usually benign weekly unemployment benefits data helped ease concerns about the economy.

DataTrek co-founder Nicholas Colas wrote in a note Friday morning that a rally of this magnitude following a report like initial jobless claims said “more about the fragile state of the stock market and nervousness about economic data than anything else.”

Neil Dutta, economics director at Renaissance Macro, agreed. “Markets are clearly on edge,” Dutta wrote in a note published Thursday morning. “We’re up 1.5% today on jobless claims! That’s unusual.”

“If next week’s data surprises us negatively, guess what? It will only fuel the idea that the Fed is a little late.”

The coming week will provide plenty of material to fuel the ongoing debate over the health of the U.S. economy, with inflation and retail sales data likely to serve as the highlights of the week.

The Consumer Price Index (CPI) is expected to show inflation rising 0.2% in July, while consumer prices are expected to rise 3% from a year earlier. On a “core” basis, prices are expected to have increased 3.2% from a year earlier, down from the 3.3% increase seen in June.

Retail sales, excluding autos and gasoline, are expected to have increased 0.2% month-on-month in July. That would mark a slowdown from the 0.8% sales growth seen in June.

Bank of America Chief Economic Officer Michael Gapen said in a note to clients last week that a weak retail sales figure “may not excite markets, which remain mindful of downside risk.”

But given the strong increase in retail sales in June, a weaker figure “still leaves spending on track for a reasonably strong quarter,” Gapen said.

“Overall, if the data comes in as expected, we expect the market to price in fewer declines this year and reduce the likelihood of a large decline in September,” Gapen wrote.

On Friday, markets were pricing in about a 52% chance that the Federal Reserve will cut interest rates by 50 basis points by the end of September, down from 75% a week earlier. according to the CME Fedwatch tool.

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