After a week dominated by inflation concerns and Federal Reserve policy speculation, markets are poised for a relatively subdued five-day stretch. Big-box retailer earnings and a slate of manufacturing economic indicators will capture investor attention. Last week, the S&P 500 gained 0.4% and the Nasdaq rose 0.6%, while the Dow Jones Industrial Average slipped 0.6%.
Following several turbulent weeks, this quieter trading period — as summer winds down and the back-to-school season approaches — could offer a much-needed breather for markets, barring any unexpected headlines or major geopolitical developments.
Where to focus this week
The corporate earnings calendar is headlined by big-box retail results. Chinese tech giant Baidu (BIDU) kicks things off Tuesday, with investors closely watching its AI cloud revenue. Thursday brings a wave of retailer reports: Wal-Mart (WMT), Alibaba (BABA), Ross (ROST), and Deere (DE) all release quarterly figures, followed by BJ's Wholesale Club on Friday.
On the economic data front, manufacturing metrics take precedence. The Fed releases industrial production and manufacturing output data Tuesday, with the S&P Global US Manufacturing PMI due Friday. Housing starts data arrives Tuesday, with expectations pointing to a notable decline, and Wednesday brings the minutes from the Fed's latest policy meeting.
Equities rise, yet sentiment sours
It's fair to say market mood is under pressure. The University of Michigan's preliminary consumer sentiment index shows Americans grew increasingly pessimistic about the economic outlook in August, citing regional conflicts, rising Treasury yields, and geopolitical uncertainty. Survey director Joanne Hsu noted that "consumer sentiment declines in early August were broad-based, with particularly sharp drops among older, lower-income, and less-educated consumers — groups that tend to feel the sting of inflation most acutely."
With the latest CPI and PPI readings showing only modest inflation improvement, just 8% of consumers expect their incomes to outpace inflation over the next year. Following the inflation data, traders trimmed bets on a September Fed rate hike. Earlier, a sharply disappointing July jobs report had left markets evenly split between a hike and a hold. Now, pricing suggests roughly a 70% chance the Fed holds rates steady in September.
Adding to the downbeat picture, the Commerce Department reported retail sales fell 0.6% month-over-month on Friday, versus expectations of a 0.1% gain, fueling concerns about the resilience of American consumer spending.
AI capital spending hits real-world limits
As earnings season winds down, estimates for cloud giants' AI data center investments this year are being revised upward once again. Goldman Sachs projects global spending of $1 trillion in 2026, JPMorgan forecasts $697 billion in the US, and BofA sees the figure potentially reaching $1.2 trillion by 2027.
But money isn't the bottleneck. Despite expanding manufacturing capacity, chip shortages persist. Construction contractors face widespread skilled labor gaps, struggling to meet client timelines. Meanwhile, public resistance to large data centers is spawning new regulatory hurdles: New York has enacted a one-year moratorium on new data center construction, and Texas has launched reviews of grid connection requests.
Electricity may be the most binding constraint of all. BloombergNEF estimates that at current expansion rates, AI data centers could face a 19-gigawatt power shortfall by 2035. George Gianarikas, a Canadian energy industry analyst, told Yahoo Finance: "Looking at all the constraints, data center operators want enough power to train their models, but we firmly believe project timelines won't meet their expectations."
Wood Mackenzie recently noted that data center operators are submitting duplicate power requests to multiple utilities to circumvent approval delays. Due to what the energy research firm calls "phantom demand" and inexperienced operators, grid and utility companies ultimately approve only about 28% of requested capacity.
The dollar caught between two forces
Senior FX strategist Jane Foley at Rabobank noted in a research note Thursday that the dollar is being pulled between oil prices and Fed policy. The traditional inverse relationship between the dollar and crude is breaking down. Historically, oil and the dollar moved in opposite directions — since oil is priced in dollars, a stronger greenback raises costs for overseas buyers and pressures commodity prices.
Foley says this dynamic began shifting in 2022 with the Russia-Ukraine conflict, as the US firmly established itself as a major energy exporter. The Iran conflict disrupting Hormuz Strait shipping has further altered the relationship. Oil price spikes used to be almost entirely negative for the US economy. But this time, the Iran conflict has triggered one of the largest energy supply crises on record, creating expansion opportunities for domestic US oil producers and boosting energy exports at higher prices.
Foley wrote: "As long as Hormuz Strait shipping remains constrained, the dollar is likely to maintain a safe-haven premium supported by the US's energy exporter status."
At the same time, another force is weighing on the dollar: a notably weaker July jobs report and tame inflation data have led investors to scale back rate hike expectations, removing a key support. Adding to the mix, the Treasury recently conducted large-scale FX intervention involving the yen. Notably, Treasury Secretary Scott Bessent chose to sell euros rather than dollars to buy yen, signaling the White House's intent to defend the dollar's floor.
Economic and earnings calendar
Monday
Economic data: August NY Empire State Manufacturing Index (expected 10, prior 15.6); August NAHB Housing Market Index (expected 33, prior 34). Earnings: BHP Billiton (BHP).
Tuesday
Economic data: ADP weekly employment data; NY Fed Services Index; July import/export price indices; July housing starts (month-over-month); July industrial production and manufacturing output (month-over-month). Earnings: Keysight Technologies, Baidu (BIDU), Pony.ai.
Wednesday
Economic data: MBA mortgage applications index for week ending August 14; July FOMC meeting minutes. Earnings: TJX Companies.
Thursday
Economic data: August Philadelphia Fed Business Outlook Index; initial jobless claims and continuing claims. Earnings: Wal-Mart (WMT), Alibaba (BABA), Deere (DE), Ross (ROST).
Friday
Economic data: August S&P US Manufacturing, Services, and Composite PMI flash readings. Earnings: Ubiquiti Networks, BJ's Wholesale Club.
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