Stocks’ whipsaw week leaves markets ‘tense’ ahead of busy economic data week

Last week, the S&P 500 (^GSPC) posted both its worst and best daily performances of the year.

To some on Wall Street, this is a sign that all is not well in the markets right now.

On Monday, rising recession worries combined with a sell-off abroad to spike volatility and send stocks tumbling, with the S&P 500 down 3%.

Stock markets on Thursday posted their best one-day rally since 2022, rising 2.3% as typically favorable weekly jobless claims 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 “had more to do with the fragile state of the stock market and nervousness about economic data than anything else.”

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

“If you get some negative surprises in the data next week … guess what happens? It will just reignite the discussion about the idea that the Fed is a little bit behind the curve.”

The coming week will provide ample fodder for the ongoing debate over the health of the US economy. The highlights of the week are likely to be inflation figures and retail sales figures.

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

Retail sales, excluding autos and gasoline, are expected to have risen 0.2% month-on-month in July, a slowdown from 0.8% growth in June.

Michael Gapen, chief economics officer at Bank of America, stressed in a note to clients last week that weak retail sales “may not enthuse markets as they are aware of downside risks.”

But given the big jump in retail sales in June, weaker numbers still leave spending on track for a reasonably strong quarter, Gapen said.

“If the data matches our expectations, we expect the market to price in fewer cuts this year, reducing the likelihood of a large cut in September,” Gapen wrote.

On Friday, markets had already priced in a 52% chance that the Federal Reserve would cut rates by 50 basis points by the end of September, up from 75% a week earlier, according to the CME Fedwatch Tool.

The story continues

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

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

And if markets price in fewer Fed rate cuts and Treasury yields rise after next week’s numbers, that could be a positive catalyst for stocks, given that the market is now in an environment where bad is bad and good is good.

“Not only is good news good, I think good news is very good, and bad news is very bad,” Michael Kantrowitz, chief investment strategist at Piper Sandler, said in a video to clients on Friday.

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

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

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