Upcoming Economic Data to Heavily Influence Markets and Voter Sentiments
A plethora of high-profile U.S. economic releases on tap will be closely scrutinized by both investors and voters alike. For markets, the incoming data could solidify or upend expectations around the Federal Reserve's next policy moves - a key driver of asset prices. At the same time, readings on inflation, consumer spending, and employment will be viewed by voters as scorecards on the incumbent administration's economic leadership ahead of upcoming elections.
Inflation Data Front and Center
The main event is Wednesday's July Consumer Price Index report. Economists forecast headline CPI rose 3% year-over-year, matching June, with core CPI increasing 3.2%. A hotter-than-expected print, especially for core prices, could mean the Fed needs to keep rates higher for longer to definitively tame inflation. It could also hand ammunition to opposition parties criticizing the White House over persistent inflation eroding consumer purchasing power.
Consumer Spending Power in Focus
Thursday's July retail sales data will offer insights into the health of the American consumer - a key driver of economic growth. Consensus estimates call for a 0.3% rise in sales, decelerating from June's robust 0.8% gain excluding autos and gas. A sharper-than-anticipated spending slowdown could heighten fears about economic weakness spilling over into a broader pullback.
Economic Conditions Shaping Voter Behavior
Historically, periods of high inflation, rising unemployment, and slowing wage growth have bred anti-incumbent sentiment as voters seek change at the ballot box. Conversely, low inflation, rising real incomes, and plentiful job opportunities make it easier for the party in power to tout effective economic stewardship of the nation's finances. However, it's a nuanced dynamic as economic considerations exist alongside myriad other priorities for voters based on individual situations and beliefs. But pocketbook issues like the cost of living still carry significant weight in how the electorate assesses who should be leading the country.
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For Markets: Rapidly Evolving Rate Outlook Key Driver
The incoming economic data will further shape the ever-evolving interest rate expectations that have been a key driver of asset prices so far this year. Readings aligned with consensus could potentially boost stocks by decreasing bets on aggressive future Fed rate cuts. But upside surprises may raise worries that an even higher terminal rate is needed to tame inflation.
Regime Shift: "Good News is Good News Again"
For much of 2023, underwhelming data sparked stock rallies on hopes it would push the Fed to ease monetary policy. However, Piper Sandler's Michael Kantrowitz believes that trade is reversing, suggesting "good news is actually going to be very good, and bad news is going to be very bad" for investors going forward. Adding another potential market catalyst, any cracks in the reasonably solid 10.8% earnings growth for S&P 500 companies so far could further fuel volatility.
Bottom Line: More Swings Likely
With shifting market dynamics and rapidly evolving Fed rhetoric, investors should prepare for more turbulent trading as each new piece of data gets dissected for its potential impact on the all-important path of interest rates and central bank actions. For voters, the incoming economic tea leaves will also be viewed as scorecards on the incumbent party's policies ahead of rendering their judgement at the polls. Buckle up for another period of high-stakes uncertainty being navigated in real-time by policy makers, corporations, voters and market participants alike.
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