These Three Events Will Get Stocks Moving This Week

Monthly Inflation Report for June

Investors want nothing more than to see lower interest rates.  The Fed has made it clear that they need more proof that their efforts to tamp down inflation have been effective before they move.

This week’s release of the Consumer Price Index and Producer Price Index may be the proof needed.

We’ll get our first look at inflation with June’s CPI data Wednesday morning at 8:30 eastern time.

Economists are expecting to see headline growth of 3.1% from Thursday’s report.  That number would be lower than last month’s read of 3.3% and show progress, but not enough.

The Fed’s target rate of 2.0% is getting closer, but we’re still hearing rumblings from Fed Presidents that we’re not low enough to consider a drop in rates at the next FOMC meeting on July 30-31.

Thursday’s CPI report will be followed on Friday by the Producer Price Index (PPI) report for June.

The Producer Price Index measures the average change in the selling prices that domestic producers receive for their goods and services.

Expect this report to be more of a focus for the Fed as it tends to signal whether the inflationary pressures “upstream” are easing.

The last two months have seen mixed readings of the CPI and PPI reports.  This week’s report may help the Fed to rationalize an interest rate cut if both measures come in lower.

MBA Mortgage Applications Index

I know this data doesn’t sound exciting, but investors need to start watching the housing market more closely.

The last two years of higher rates have put pressure on the real estate market, but tight inventory and post-pandemic savings have allowed would-be homeowners to keep the market’s moving.

Just last month we saw home values hit all-time highs due to the imbalance of buyers to sellers, but the trend is looking like it is coming to an end.

Mortgage applications dropped 2.6% last week and appear to be heading towards their May lows of -5.7%.

The reason is that high rates, high prices and a surge of multi-family housing that is finally making its way to the market are dropping interest in purchasing a house.

Home sellers have been playing a game of “chicken” with buyers as they hold their asking prices above market, but the length of time that listings are staying on the market is beginning to extend to an uncomfortable length.

All of this ties into the recent earnings reports from homebuilders.

Both Lennar (LEN) and KB Homes (KB) reported dramatic drops in quarterly earnings last month as the housing market is showing signs of slowing.  This, even though they have been heavily incentivizing buyers.

A slowdown in the housing market is almost always associated with a slowdown in the economy, which is why the housing market is slowly becoming more important to watch than the “Magnificent Seven” stocks.

Keep an eye on the Mortgage Applications (yawn) and the SPDR Homebuilders ETF (XHB) as we make our way through July for an indication on where stocks will head in the fourth quarter.

Earnings Season Begins!

It’s that time of the year for another earnings season to begin… and it couldn’t have come at a better time.

Once again, the Magnificent Seven and other large cap tech stocks have picked the market up and carried it higher.

As of Friday, only 45% of the S&P 500 companies were above their 50-day mobbing averages, despite the fact that the S&P 500 hit new all-time highs.

Put simply, the market cannot survive much longer with a small handful of companies doing all of the work.

Enter earnings season.

This Friday we’ll get earnings reports from Citigroup (C), JP Morgan (JPM) and Wells Fargo (WFC).

The trio of bank earnings reports now serves as the unofficial beginning of the earnings season.

We always say it, but this quarter may prove to be the most important earnings season in years.

The current valuation of the S&P 500 sits at around 21 times earnings, which is above the average of 19.

This is a simple indication that stocks are “priced above full valuation”, meaning that investors will be looking for confirmation that they should be holding stocks.  That confirmation will come in the form of earnings and revenue guidance from companies’ management.

Heading into the quarter, 67 of the S&P 500 companies have guided this quarter’s earnings lower while only 45 guided this quarter higher.

Over the last year, the majority of earnings guidance has been positive.  That means that investors have been bidding stocks higher, even though companies have warned of poorer performance.

Let me bottom line that for you.  Companies have been telling investors that earnings are getting weaker, but investors keep driving values higher.

That puts the market in a higher risk situation as we work through the season with stocks at all-time highs.

I’ll Profile Three Earnings Stocks to watch on Tuesday to help guide you through what is likely to be a bumpy earnings ride.