The Federal Reserve rules on interest rates on Wednesday, with wagers pointing to a 66% probability that rates stay in a range of 3.5% to 3.75%. Microsoft, Meta Platforms, Apple and Amazon — four companies that account for 17% of the S&P 500 — report on Wednesday and Thursday. Core PCE on Thursday and the Employment Cost Index on Friday close the week.
Wagers are forecasting a 66% probability that the Federal Reserve leaves rates unchanged at a range of 3.5% to 3.75% when its two-day meeting ends on Wednesday. There is just under a one-in-three chance that the central bank raises borrowing costs instead. That decision opens a week that also carries megacap technology earnings and the Fed’s preferred inflation gauge.
Fed weighs the Iran war’s effect on inflation
Policymakers are likely to be paying close attention to the impact of the Iran war on inflation. A recent surge in oil prices threatened to ignite concerns over a wave of inflation that could persuade the Fed to lift rates in response. Raising rates can in theory put a lid on inflation, albeit at the risk of weighing on the labor market.
But oil has turned lower. Prices fell sharply to roughly $91 a barrel on Monday after a tit-for-tat exchange of strikes between the United States and Iran paused for a second consecutive day on Sunday. Most analysts assume Chair Kevin Warsh will not be in favor of monetary tightening, although some Fed members may back an immediate hike, Reuters reported.
Four megacaps account for 17% of the index
Meanwhile, Microsoft and Meta Platforms report after the closing bell on Wednesday, followed by Apple and Amazon on Thursday. The four together make up 17% of the benchmark U.S. stock index, which could imply that markets may be swayed by their numbers. The S&P 500 last closed at 7,411.98, up 0.05%.
In particular, investors will likely keep close tabs on the four companies’ plans to spend on artificial intelligence infrastructure like data centers and chips, as questions have begun to arise around the sustainability of the spending spree. Analysts at Vital Knowledge flagged worries that increasing capital expenditures will eventually swamp operating cash flows. Taken together, the central bank decisions and tech earnings will test two assumptions that have underpinned markets in recent months — moderating inflation and an intact AI-driven earnings story — in what Laurence Booth, Global Head of Markets at CMC Markets, said could become “one of the most important of the year for markets.”
Core PCE and labor costs close the week
June’s U.S. personal income and spending report, due Thursday, folds in the latest reading of core personal consumption expenditures. Economists at Deutsche Bank anticipated core PCE will increase by 0.19% month-on-month, bringing the annual rate up to 3.3%. The Fed has set the goal of keeping inflation at 2%.
Friday’s Employment Cost Index follows, and the same economists expect its annual growth rate to remain at 3.4% — a level many policymakers would still view as broadly consistent with returning inflation towards target over time, they wrote. By the end of the week, roughly one-third of S&P 500 companies will have reported quarterly returns. Earnings are on track to grow 26.5% compared to a year ago.
Source: Investing.com
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