Good Data Could Be Good News Again for Stocks

Inflation and Consumer Health in Focus

After a rollercoaster week, all eyes are on key economic data that will help determine if good news becomes good news again for the stock market. First up is July's Consumer Price Index on Wednesday, with expectations for headline inflation to rise 3% year-over-year as price pressures continue moderating.

On Thursday, retail sales for July will offer clues on the resilience of the U.S. consumer. Forecasts call for a 0.3% rise, down from June's strong 0.8% gain ex-autos and gas. Any demand cracks could stoke recession fears.

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Fed Rate Hike Bets Swing Wildly

These releases follow a dizzying shift in expectations around the Federal Reserve's rate path. Just two weeks ago, markets ruled out any chance of a September rate cut. But the narrative flipped to betting on an aggressive 50 basis point cut before moderating to around 50% odds of that outcome.

According to Bank of America's Michael Gapen, incoming data matching projections "look[s] for the market to price in fewer cuts this year" which could have major implications.

Bad News Was Good News, But Not Anymore?

For months, disappointing economic figures boosted stocks on hopes of a more dovish Fed pivot. But Piper Sandler's Michael Kantrowitz believes those dynamics are reversing: "Good news is actually going to be very good, and bad news is going to be very bad."

Earnings Still Holding Up...

Adding a potential positive catalyst, S&P 500 companies are tracking 10.8% earnings growth so far this quarter. Any cracks in the corporate profit picture could prove another volatility trigger.

...But More Swings Expected

Investors should buckle up for more turbulence as markets attempt to decode the Fed's next steps amid the conflicting data. After last week's wild moves, the direction of incoming economic releases could solidify the rally's footing or plant seeds for the next sell-off.

Unlocking which campdrives the bigger market reactions will be critical for traders positioning ahead of fateful Fed decisions in the months ahead. Get ready for an economic data plethora that could separate the pretenders from the contenders.

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