What's Driving Market Momentum

Financial markets in major economies are entering a pivotal week that could set the tone for market momentum through late summer. US employment figures intersect with a fresh wave of corporate earnings results, all against a backdrop of geopolitical tensions, uncertainty around Federal Reserve interest rate policy, notable volatility in major technology stocks, and a series of upcoming economic data releases from China. Investors watching for signs of sustained market momentum will be parsing each data point closely.

Performance of Major Economies

1. United States: Jobs Data and Fed Policy in Focus

The Federal Reserve's monetary policy meeting has stirred questions among investors about its implications for equity markets and broader market momentum, amid what several observers described as mixed signals regarding the central bank's plan to curb inflation.

According to comments from senior investment officials, the shift in leadership style at the Federal Reserve, particularly regarding forward guidance and communication transparency, may bring higher volatility around the release of key economic data, given reduced clarity about the future path of interest rates.

July Jobs Report: Wall Street's Key Catalyst

The monthly US jobs report, due for release on August 7, is drawing widespread attention from Wall Street participants and is widely seen as the week's biggest test of market momentum. According to a Reuters survey, forecasts point to an increase of 91,000 non-farm payroll jobs, compared with a prior reading of 57,000, with an unemployment rate of 4.3%.

Given the Federal Reserve's focus on curbing inflation, any surprise weakness in the jobs report would reinforce expectations of a more accommodative policy stance from the Fed, especially if paired with a pullback in oil prices.

Federal funds futures data, as of Thursday, point to a 68% probability of an interest rate hike at the upcoming September meeting, according to data from the London Stock Exchange Group.

Earnings Season: Over a Quarter of the S&P 500 Set to Report

More than a quarter of companies listed on the S&P 500 are set to report Q2 earnings in the coming week, including Caterpillar, Palantir, Merck, pharmaceutical giant Eli Lilly, and semiconductor design firm Advanced Micro Devices (AMD). Strong results across these names could be the next major driver of market momentum heading into September.

According to LSEG IBES data released Wednesday, and factoring in results already reported plus estimates for remaining companies, S&P 500 second-quarter earnings are expected to rise 27.7% year-over-year on an adjusted basis.

Elon Musk's SpaceX is also set to release its first quarterly report as a newly public company on Tuesday, after its stock pulled back following the sharp rally that followed its IPO last month, a development that could carry broader implications for investor risk appetite and overall market momentum.

Pressure Factors: Geopolitical Tensions, Oil Prices, and Bond Yields

Escalating geopolitical tensions, including rising friction between the United States and Iran, are adding an extra layer of complexity to the investment landscape, with rising oil prices feeding through into higher US Treasury yields amid renewed inflation concerns.

Concerns over stretched valuations in parts of the AI trade, particularly semiconductor stocks, which posted striking gains before pulling back during July, have also weighed on major indices and tempered near-term market momentum.

That said, historical patterns suggest equity markets tend to continue their upward trend, or return to it, once companies demonstrate strong earnings growth, a dynamic that could help extend the market's roughly four-year bull run.

2. European Economy: Energy Costs and Inflation Risk

Eurozone economic data is expected to provide further evidence of how the bloc is being affected by accelerating energy costs, with European officials and analysts seeing rising inflation risks as reinforcing openness to a rate hike at the upcoming September meeting.

Key data releases to watch this week include:

  • Producer Price Index (PPI)
  • Manufacturing PMI
  • Services PMI
  • Retail Sales

These indicators are expected to shed further light on the trajectory of eurozone trade relations and inflation trends in the months ahead.

3. Asian Economy: Japan and China in Spotlight

A. Japan: BOJ Minutes and Yen Pressure

The Bank of Japan will publish the minutes of its latest meeting, at which it held interest rates steady at 1%, despite sharp declines in the Japanese yen and pressures that support the case for direct government intervention to defend the currency.

Manufacturing PMI figures will also be released, reflecting the inflationary pressure facing Japanese industries, which remain almost entirely dependent on imported oil.

These inflation expectations will be reinforced by indicators such as household spending, which continues to disappoint and remains in negative territory on a year-over-year basis.

B. China: Trade and Inflation Data on Deck

Chinese trade data will be released on Friday, amid anticipation of further signals on the widening trade imbalance that has fueled tensions with major trading partners, including the European Union, in recent months. ING Bank estimates point to continued strength in exports and imports, with exports expected to grow 28% and imports around 34%, resulting in a trade surplus of $112.6 billion.

ING added that technology-related goods will likely continue driving Chinese trade, while a recovery — or continued sluggishness — in Chinese oil imports will be closely watched, as weak import demand is thought to have helped hold down oil prices since the onset of the Middle East crisis earlier this year.

China will also release inflation data, amid major efforts by officials to counter deflationary pressures stemming from intense price competition and weak consumer spending, with subdued inflation remaining one of the most prominent constraints on the Chinese economy.