Whipsaw 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 performance of the year in a single day.

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

On Monday, growing recession concerns, combined with overseas selling, sparked a spike in volatility and sent stocks lower, with the S&P 500 down 3%.

On Thursday, stocks rose 2.3%, their best one-day pace since 2022, as a release of typically benign weekly jobless 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. “.

Renaissance Macro’s chief economist Neil Dutta agreed. “Markets are clearly on edge,” Dutta wrote in a note on Thursday morning. “We’re up 1.5% today because of jobless claims! It is unusual.

“If you get some downside surprises in the data next week…guess what happens? It will only fuel the discussion that the Fed is a little behind the curve.”

Next week will provide plenty of fodder for the ongoing debate about the health of the US economy, with inflation data and retail sales data likely to serve as the week’s highlights.

The consumer price index (CPI) is expected to show inflation rose 0.2% in July, while consumer prices are likely to have risen 3% from a year earlier. On a “core” basis, prices are expected to have risen 3.2 percent from a year ago, less than the 3.3 percent increase seen in June.

Retail sales, excluding cars and gas, are expected to have risen 0.2% month over month in July. This would mark a deceleration from the 0.8% sales growth seen in June.

Bank of America Chief Economist Michael Gapen pointed out in a note to clients last week that a soft retail sales print “may not excite markets, which remain aware of downside risk.”

But given the big increase in retail sales in June, a weaker print still “leaves spending on track for a pretty strong quarter,” according to Gapen.

“Overall, if the data pans out as we expect, we look for the market to price in fewer cuts this year and reduce the likelihood of a big cut in September,” Gapen wrote.

As of Friday, markets had priced in a roughly 52 percent chance the Federal Reserve would cut interest rates by 50 basis points by the end of September, down from 75 percent a week earlier, according to CME’s Fedwatch tool.

The story continues

Read more: What the Fed rate decision means for bank accounts, CDs, loans and credit cards

After several months of data showing rising unemployment and other signs of slack in the labor market, markets moved from fearing better-than-expected economic growth that could fuel inflation to cheering the data as a sign that the U.S. economy can avoid recession.

And if markets move to price in less Fed tapering and bond yields rise following next week’s data, that could be a positive catalyst for stocks as the market shifts to an environment where the bad is bad and the good is good

“Not only will the good news be good, I think the good news will actually be very good and the bad news will be very bad,” Piper Sandler chief investment strategist Michael Kantrowitz said Friday in a video for customers.

“We’re going to see a lot of good days, a lot of bad days and a lot more market volatility than we’ve seen most of this year.”

Josh Schafer is a reporter for Yahoo Finance. Follow X @_joshschafer.

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