Pivotal economic and political news awaits this week. As investors hold their collective breath, the markets have slipped into a rare calm, much like the stillness before a summer storm.

This week promises to break the silence with Federal Reserve Chair Jerome Powell’s remarks in Congress on Tuesday and Wednesday, and key inflation reports on Thursday and Friday. Meanwhile, the bond markets remain in a steady state, with rates standing firm after a slight dip in the 10-year yield.

Adding to the suspense, political dramas are unfolding on both sides of the Atlantic. The beleaguered candidacy of President Biden and surprising twists in France’s national election are injecting an extra dose of turmoil into an already charged atmosphere.

The left-center coalition in France unexpectedly beat back a challenge from the far right, although not enough to win an outright majority. In Britain, a left-center groundswell put the Labour party back in power with a landslide.

In the U.S., we’ll see how the right-versus-left contest pans out in November. Biden has been sinking in the polls due to his disastrous debate performance. The prospect of Donald Trump returning to the White House is causing severe anxiety among a wide swath of the electorate. Many world leaders and corporate chieftains are worried as well.

Despite these weighty political factors, the main focus of Wall Street remains on the combined outlook for inflation, Fed policy, and the economy, resulting in steady markets as investors await further details to refine their expectations.

Recent economic data suggest a slowdown in the economy. The June jobs report and latest initial jobless claims indicate a slight easing in the labor market. ISM manufacturing and services data also reveal a deceleration in activity.

While a recession does not seem imminent, the economy appears to be shifting to a slower pace.

The most recent economic signals may prompt the Fed to consider easing policy sooner to support growth before the economy loses further momentum. However, inflation remains above the level that would fully support monetary stimulus, complicating the Fed’s decisions.

These uncertainties have not stopped the S&P 500 from hitting record highs (see chart).

Momentum is clearly with the bulls, with the benchmark SPDR S&P 500 ETF (SPY) hovering above its 20-, 50- and 200-day moving averages.

Chairman Powell’s semiannual testimony Tuesday in the U.S. Senate reiterated progress on inflation, combined with his concerns about moving too quickly to ease monetary policy.

Inflation “remains above” the Fed’s 2% target, Powell told members of the Senate Banking Committee, but has been improving in recent months and “more good data would strengthen” the case for central bank interest rate cuts.

Powell testifies again on Wednesday in front of the U.S. House. In this campaign year, I expect Powell’s appearances on Capitol Hill to be marked by a lot of posturing and combative questions from members of Congress. (We got a taste of that on Tuesday, as Powell was peppered with partisan questions that sometimes betrayed a lack of even basic economic knowledge.)

With the jobs market showing early signs of softening, Powell is focused on balancing the Fed’s dual mandate of low inflation and full employment.

Another highlight this week will be the latest inflation data, with the consumer price index (CPI) report scheduled for Thursday and the producer price index (PPI) following on Friday. Core CPI is projected to be around 3.4%, consistent with the previous month and the lowest since early 2021.

Any deviations from this forecast could prompt market reactions. A lower-than-expected CPI figure could increase expectations for a rate cut in September.

This week also features the start of second-quarter corporate earnings announcements, beginning with several major U.S. banks on Friday.

For Q2 earnings season, while mega-cap technology results will be significant, attention also will be on results from cyclical sectors such as consumer discretionary and industrial. These earnings reports will help markets assess recent economic trends through the lens of corporate profitability and management commentary.

Corporate earnings growth will be a key driver of market performance in the latter half of 2024. Stocks could tumble if bellwether companies, such as the big banks, post disappointing operating results. So..buckle up for a turbulent week.

On Tuesday, the main U.S. stock market indices closed mixed, but the S&P 500 and NASDAQ once again notched record highs, as follows:

• DJIA: -0.13%
• S&P 500: +0.07%
• NASDAQ: +0.14%
• Russell 2000: -0.45%

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