What to expect from the market in July 2023

Exploring the implications of inflation, recession fears, and earnings performance on the market in July 2023

By Ahmed Azzam | @3zzamous | 15 June 2023

What to expect from the market in July-2023
  • Inflation cools in June but remains above target

  • Softened housing market and manufacturing activity raise recession concerns

  • US labor market remains resilient with 339k jobs added in May

  • S&P 500 earnings decline due to rising interest rates and consumer confidence

  • Key economic data to watch in July: US employment, CPI, FOMC minutes

In May, investors appeared to disregard the ongoing debt ceiling turmoil and the impending banking crisis. Instead, their attention shifted towards the alluring prospect of the Federal Reserve putting a stop to its rate increases. Even though worries about a potential recession in late 2023 had persisted for almost a year, investors found comfort in the satisfactory performance of first-quarter earnings and the possibility of the Fed taking a break, which paved the way for a steady market performance in June. The focal points of market conversations revolve around two pivotal factors: inflation and interest rates.

As inflation cools, federal reserve considers pausing rate increases

In June, the consumer price index experienced a slowdown to a 4.0% year-over-year growth rate. This was a decline from the peak inflation levels of 9.1% witnessed in 2022 but still comfortably higher than the Federal Reserve's desired long-term target of 2%. In May, the Federal Open Market Committee (FOMC) proceeded with its tenth consecutive quarter-point increase in interest rates since March 2022. Federal Reserve Chairman Jerome Powell acknowledged that the current policies are "restrictive" and highlighted the importance of carefully evaluating data and the evolving economic outlook before making a decision on interest rates during the July meeting. If the inflation data for June printing indicates levels higher than expected, the possibility of another interest rate hike in July remains a possibility. Powell has specifically criticized the "stop and go" monetary policies of the 1970s, which led to stagflation and necessitated a forceful monetary response to restore price stability.

US Recession concerns loom amidst softened housing market

In recent months, the housing market in the United States has experienced significant weakening, accompanied by a decline in manufacturing activity. ISM Manufacturing PMI added recession fears with its 7 months shrink.

Moreover, the US Treasury yield curve has remained inverted since mid-2022, historically indicating a strong indication of an upcoming recession. However, the robustness of the US labor market has been the most compelling argument for a potential soft economic landing. In June, the Labor Department reported a noteworthy addition of 339,000 jobs to the US economy, surpassing economists' projections of 180,000 job gains. Additionally, US wages have seen a year-over-year increase of 4.4%, while the unemployment rate has risen to 3.7%, still maintaining one of the lowest levels observed in recent years.

Earnings slump driven by rising interest rates

The combination of rising interest rates and declining consumer confidence poses a significant obstacle to the expansion of S&P 500 earnings. The financial results for the first quarter reveal a blended earnings growth rate of approximately -2.2%, indicating a consecutive decline in S&P 500 earnings for the second quarter in a row. The impact of this earnings deceleration has varied across different market sectors. Notably, the consumer discretionary sector experienced a remarkable surge of 53.9% in earnings during the first quarter, while the industrial sector also demonstrated commendable growth of 22.5% compared to the previous year. On the other hand, the materials and utilities sectors faced a downturn of over 20% each during the same period. Looking ahead to the second quarter, analysts anticipate a 6.4% decline in S&P 500 earnings compared to the previous year. However, there is optimism among these analysts as they project a recovery in S&P 500 earnings, with a potential return to positive growth in the latter half of 2023. The third quarter is estimated to see a growth rate of 0.7%, followed by a more significant growth rate of 8.1% in the fourth quarter.

Key Economic Data to Watch in July

July presents a calendar replete with essential economic indicators that will undoubtedly sway market sentiment and policy decisions. Among the notable data releases, investors will closely monitor the following

- Cash Rate from the Australian Bank

- FOMC Meeting Minutes

- US Average Hourly Earnings

- US Non-Farm Employment Change

- US Unemployment Rate

- US Consumer Price Index (CPI)

- Bank of Canada's Overnight Rate decision

- UK's Gross Domestic Product (GDP)

- Consumer Price Index for Canada (CAD CPI)

- Consumer Price Index for the UK (UK CPI)

- Consumer Price Index for New Zealand (NZD CPI)

- Australian Consumer Price Index (AUD CPI)

- European Central Bank's (ECB) Main Refinancing Rate

- Bank of Japan's (BOJ) Policy Rate

- US Personal Consumption Expenditures (PCE) Price