Investors are eagerly gearing up for an exciting Friday open in the U.S. stock market! After a minor downturn in the previous session, stock futures are now pointing to a positive start, fueled by high expectations surrounding crucial inflation and employment cost data. Here’s a quick overview: ? Dow Jones Industrial Average futures: +117 points (0.3%) ? S&P 500 futures: +0.5% ? Nasdaq 100 futures: +0.8% While the Dow recently concluded an impressive 13-day winning streak, the market has remained relatively stable throughout the week. However, the current surge in futures reflects investors’ optimism as they await the release of influential data that could sway market sentiment. Today’s most anticipated event is the publication of the June personal consumption expenditures price index, a closely monitored indicator by the Federal Reserve for gauging price growth. Forecasts indicate a slowdown in headline PCE, projecting a 3% annual pace in June, down from the previous month’s 3.8%. Additionally, the Bureau of Labor Statistics will unveil the quarterly Employment Cost Index, expected to reveal a 4.8% annual growth rate in hourly labor costs for employers during the second quarter, with a 1.1% increase quarter to quarter. Analysts at ING emphasize that a softer ECI number could have implications for the U.S. tightening cycle this year, potentially leading to a 0.5%-1.0% drop in the dollar. Such a development could bode well for risk assets, possibly bringing the Federal Reserve and even the European Central Bank closer to concluding their tightening cycles. Keep a close eye on these crucial data points as they unfold throughout the day, as they may significantly influence the trajectory of the market! Stay tuned for updates! ??

1️⃣ Dow’s Remarkable Streak: The Dow Jones continues its impressive 13 positive sessions, a feat not seen on Wall Street since 1987. If it hits 14 on Thursday, it’ll tie a record dating back to 1897, shortly after its creation. The recent win followed the Federal Reserve’s benchmark rate increase, with Chairman Jerome Powell highlighting the need for further progress while leaving the possibility of holding steady at the September policy meeting open. 2️⃣ McDonald’s Victory: McDonald’s success is attributed to a viral promotional campaign featuring its big, purple mascot, Grimace. The campaign drove customers to the company’s restaurants, contributing to a strong quarter. Sales saw growth across the board, with China rebounding, and the United Kingdom and Germany showing robust sales growth. In the U.S., the company’s largest market, sales surged by 10.3% in the quarter. 3️⃣ Meta’s Strong Showing: Mark Zuckerberg’s Meta exceeded Wall Street’s estimates in its Wednesday earnings report. Investors were particularly impressed with its guidance for the current quarter, surpassing analysts’ expectations. Facebook’s digital advertising revenue rebounded, driven by Chinese companies and online retailers, as stated by Meta’s CFO Susan Li. Despite metaverse business losses, Meta’s stock rose by 8% in extended trading, already up by 160% this year. 4️⃣ Shell’s Declining Profit: Oil giant Shell reported a significant profit decline in Q2 due to falling global commodity prices. While expected, the adjusted profit figure of $5.1 billion fell short of the $6 billion estimate. French oil giant TotalEnergies also reported a notable drop in earnings, with CEO Patrick Pouyanne noting a “favorable but softening oil and gas environment.” 5️⃣ Comcast Beats Expectations: Despite cord-cutting and slowing broadband growth, Comcast, the cable, and entertainment giant, achieved another profitable quarter, exceeding Wall Street’s expectations. The fledgling streaming service, Peacock, incurred financial losses despite increasing subscribers. However, Comcast’s theme parks performed well, with Super Nintendo World boosting attendance in Hollywood, though revenue at its Orlando, Florida park experienced a slight dip. (Disclosure: Comcast owns NBCUniversal, CNBC’s parent company).”

Today, in Washington, the Federal Reserve is set to enact its eleventh rate hike within a year. However, the market may need to exercise patience for several weeks, perhaps even longer, to understand the central bank’s longer-term policy goals comprehensively. According to the real-time monitoring of interest rate bets through the CME Group’s FedWatch tool, there is a staggering 98.9% probability that the central bank will raise its benchmark Fed Funds rate by a quarter point, bringing it within a range of 5.255% to 5.5%. This marks the highest level seen in over two decades. Looking ahead beyond this imminent hike, the market indicates a mere 37% likelihood that Federal Reserve Chairman Jerome Powell and his colleagues will opt for another increase before the year concludes. This sentiment aligns with the insights shared in the Fed’s recent ‘Summary of Economic Projections,’ commonly called ‘dot plots,’ and the minutes from its last policy meeting held in June. Members of the Open Markets Committee, led by Powell, have expressed a desire for two or more rate hikes, citing robust growth, a tight labor market, and higher-than-expected inflation in the last quarter. Powell emphasized that while policy rates are restrictive, they may not be restrictive enough. Highlighting the labor market’s strength with job creation and steady wage gains, Powell outlined the resulting boost in real incomes and subsequent spending, which drives up demand. Although the decision for June’s rate hike was confirmed, Powell did not rule out the possibility of consecutive rate adjustments in the future. However, June witnessed the weakest job growth in three years, and wage growth remained stagnant, fluctuating between 0.3% and 0.4% over the past nine months. Various factors, such as the slowdown in inflation, which dipped to 3% last month, and indications of a weakening economy, could prompt the Fed to ease the rate hikes. Nonetheless, the upcoming data points scheduled before the central bank’s meeting in September and Powell’s keynote speech at the Jackson Hole symposium in August may play a pivotal role in shaping or confirming the Fed’s policy direction.

With the readjustment of the Nasdaq 100 and the expiration of options valued at around $2 trillion behind us, the market now focuses on a multitude of earnings releases and rate decisions from the Federal Reserve, European Central Bank, and Bank of Japan before heading into the quiet summer period. Morgan Stanley has regularly expressed its surprise at the resilience of this year’s stock market, which has achieved an 18% increase in the S&P 500 SPX, +0.03% and a 34% rise in the Nasdaq Composite COMP, -0.22%. Chief Cross-Asset Strategist Andrew Sheets notes that forward earnings estimates for both global equities as represented by the MSCI All-Country World Index, and the U.S. with the S&P 500 as an indicator, have remained stagnant this year. This indicates that valuation increases have driven the entire market gains. Over the past 25 years, he highlights that there have only been two occurrences of stronger multiple growth – in 2009 and 2020 – both characterized by severe recession and significant monetary easing, thus supporting the argument for elevated valuations ahead of an eventual recovery. Furthermore, Sheets refers to 1998 and 2019, when multiples increased despite a shrinking Fed balance sheet and dropping earnings per share. Interestingly, core inflation during these times hovered around 2%. He points out that, “Coincidentally, both 1998 and 2019 experienced underwhelming market performances during August-September, followed by multiple Fed rate cuts in the latter half of the years.” Sheets also emphasizes that unusual developments are happening within the capital structure, where higher returns on senior debt arrangements are observed compared to more junior exposures, resulting in an atypical inversion. As an example, he cites the yield on investment-grade corporate bonds at 5.4%, which surpasses the forward earnings yield for the Russell 1000, recorded at 4.8%. In the last two decades, this discrepancy has only been more pronounced 2% of the time. Similarly, the yield on U.S. investment-grade real estate investment trusts comes in at 5.8%, exceeding the average U.S. commercial real estate cap rate, or the underlying real estate yield, of 5.4%. Additionally, the gap between the yield on a collateralized loan obligation’s collateral and its weighted cost of liabilities is at the 7th percentile within the past ten years for both the U.S. and Europe. Sheets acknowledges that there are varying explanations behind these unusual inversions, and it is reasonable for debt to be pricier than its underlying asset amid strong growth. However, he adds, “This compression, and even a flip, in the capital structure implies that growth expectations have shifted considerably since the beginning of the year. In scenarios where growth remains solid or slows down, we think that debt generally offers a better risk/reward balance, especially when this capital structure inversion increasingly drives economic incentives to de-leverage.”