Corporate Earnings and Real-Side Data Next

The stock market may turn cautious going into the Q224 corporate earnings season.  The macro background was not as supportive as in prior quarters, suggesting there could be more mixed reports (see my June 30 blog).  

The market also will be looking for more evidence arguing for a September Fed rate cut.  After highly favorable inflation data last week,  real-side data for June will be featured this week.  The market will  look for weakness, with Fed Chair Powell having highlighted a growing concern about the possibility of a significant economic slowdown.  Consensus estimates support the idea of slower economic growth.  However, stronger prints in some cases can't be ruled out, which could disappoint the market.

The most important report is for June Retail Sales.  The consensus estimate of 0.0% m/m Total and +0.1% Ex Auto would be the third straight month of sluggish sales.  The risk is that the soft prints for April and May were just the typical pause after a strong month, in which case a third such month is less likely although not unprecedented.  Lower-priced gasoline sales need to be taken out to judge the underlying pace of sales.

Another report that risks exceeding the consensus estimate is June Industrial Production.  Consensus expects 0.3% m/m, versus 0.7% in May.  However, there is upside risk, as Total Hours Worked in Manufacturing rose 0.5% m/m in June, after +0.8% in May.  

Consensus looks for an uptick in June Housing Starts to 1.31 Mn Units after dropping to 1.28 Mn in May.  However, this pace still would be soft, as the June level would be lower than the 1.33 March-April average.   Consensus also expects a dip in June Housing Permits to 1.39 Mn Units from 1.40 Mn in May.  Although Permits tend to lead Starts and Starts lead residential construction activity, there is still residual strength in the latter.  Total Hours Worked in Residential Construction rose in May and June, possibly resulting from the strength of earlier Starts.  

The June CPI was very good news for the Fed.  Importantly, Primary and Owners' Equivalent Rent broke below their recent trend, possibly beginning, at last, to catch up to the flattening in rents shown by private surveys.  If this slower pace continues, the Fed's 2% inflation target is eminently achievable.  The report moves the evidence closer to a Fed rate cut in September.