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Earnings, Federal Reserve are next big catalysts as stocks enter week ahead on an upswing

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Traders at the New York Stock Exchange, July 20, 2021.

Source: NYSE

Here comes one of the biggest market weeks of the summer.

First, the Federal Reserve meets Tuesday and Wednesday. While no action is expected, there could be some mention of the central bank’s possible wind down of its bond program. That could move the markets since the tapering of the central bank’s bond purchases is seen as the first step on the way to interest rate hikes.

Then there are about 165 S&P 500 companies releasing earnings reports, including the biggest tech names— Apple, Microsoft, Amazon, Alphabet and Facebook. Tesla is reporting, as are industrial heavy weights Boeing and Caterpillar. There are slew of consumer names, including Procter & Gamble and McDonald’s.

There is also important economic news. The second quarter is expected to be the peak period for post-pandemic growth, and gross domestic product for the quarter will be released Thursday. On Friday, the Fed’s favorite inflation measure, the personal consumption expenditure inflation index, is released.

Fresh highs for major indexes

The three major U.S. stock indexes enter the busy week with fresh closing records. The Dow closed above 35,000 for the first time on Friday. The S&P 500 gained 1% to close at 4,411.79, and the Nasdaq Composite ended the day up 1%.

“I think earnings are going to be the show, and if the pattern we’ve seen thus far continues next week, and it’s likely it will, that’s going to find a market that has a path of least resistance to the upside and I think that’s good news,” said Art Hogan, chief market strategist at National Securities.

According to Refinitiv, earnings for the second quarter are looking to be up 78.1%.

“It’s going to be crazy,” said Hogan. “I think the order of magnitude of earnings beats is still underappreciated, and I think that will continue next week: 87% of companies are beating estimates.”

Hogan said early in earnings season, stocks of companies that beat expectations did not react, but now they are and that should continue. The fact a handful of the biggest market cap stocks — like Apple, Microsoft and Alphabet — are reporting so close to each other could have an impact.

“This is like the World Series of earnings smack in the middle of summer,” he said.

Stocks rebound

Investors will also be watching the behavior of markets themselves. Stocks ended the week with solid gains, but the bruising sell-off Monday has left its mark. Some strategists say it could have been a warning sign for more turbulence later in the quarter.

Stocks took their cue from the 10-year Treasury yield, which was falling Monday on fears the delta variant of Covid could slow global growth. The yield hit a low of 1.12% early Tuesday before reversing. As the benchmark yield rose, stocks rallied.

For now, stocks seem to be set for more gains. The Dow closed the past week at 35,061.55, up about 1%. The S&P 500 gained 1.9% for the week, ending at 4,411.79. The Nasdaq climbed 2.8% week-to-date, and the small-cap Russell 2000 rose 2.1%.

Communications services, which includes internet names, was the best performing sector in the past week with a 3.2% gain. Tech was also strong, up 2.8%. Consumer discretionary was also a top sector, up 2.9%. Cyclical industrials and material lagged with fractional gains, and energy was slightly lower.

Scott Redler, chief strategic officer with T3Live.com, said the Big Tech names like Apple and Microsoft are already doing well ahead of earnings, so it will be important to see how they trade.

“Some things are priced for perfection and some aren’t,” he said. “Microsoft is already at an all-time high. It’s priced for perfection. It will be interesting to see if Apple can hold and stay above $150.” Apple closed at $148.56 per share Friday.

Fed ‘taper talk’

Ben Jeffery, U.S. rates strategist at BMO, said Treasury yields could find a catalyst in the Fed. He expects the 10-year to begin moving down again, and says it could possibly touch a low of 1.10%. The 10-year was at 1.28% Friday afternoon.

Strategists do not expect to see much new in the Federal Reserve’s statement. They await comments from Fed Chairman Jerome Powell for guidance on the central bank’s move toward tapering back its quantitative easing program.

The Fed is expected to announce that it is officially talking about winding down the program well before it actually starts. Many Fed watchers believe that guidance will come in late August, at the central bank’s Jackson Hole symposium, or later in the fall.

“I think it will be interesting to see how dovish Powell tries to be with the delta variant risk and concerns about that,” said Jeffery.

Luke Tilley, chief economist at Wilmington Trust, does not expect much new from Powell this week. “I’m really targeting Jackson Hole as the most likely candidate for a pivot point for policy and communication,” he said. “However, next week’s meeting could set the stage for that with some statements that point us toward some improvement in the economy. They’ll be highlighting the new risks of the delta variant, and that’s the risk we think they point out.”

Slowing the bond program is important since it is a signal that the Fed is on the road to reversing its easy policies, including ultimately its zero policy rate. Tilley said the central bank will probably take a year to wind down its $120 billion a month in bond purchases, and then the door is open to rate hikes.

Investors will also be watching second quarter GDP to see how much strength there is in the economy.

According to CNBC/Moody’s Analytics rapid update, a survey of economists expects second quarter growth to grow by an average 9.7%. It is expected to be the peak period for growth, and the average forecast for third quarter growth is 8.3%.

Tilley said he expects growth for the 2021 year of 7% to 7.5%.

Week ahead calendar

Monday

Earnings: Tesla, Lockheed Martin, F5 Networks, Check Point Software, Hasbro, LVMH, Otis Worldwide, Ameriprise

10:00 a.m. New home sales

Tuesday

Fed begins 2-day meeting

Earnings: Apple, Alphabet, Microsoft, 3M, Visa, Advanced Micro Devices, General Electric, Boston Scientific, PulteGroup, Raytheon, JetBlue, Archer Daniels Midland, Chubb, Mondelez, Starbucks, Hawaiian Holdings, Waste Management, Corning, Sherwin-Williams, UPS, Stanley Black and Decker, Teradyne, Cheesecake Factory

8:30 a.m. Durable goods

9:00 a.m. FHFA home prices

9:00 a.m. Case-Shiller home prices

10:00 a.m. Consumer confidence

Wednesday

Earnings: Boeing, Facebook, Pfizer, Ford, Qualcomm, McDonald’s, Bristol-Myers Squibb, PayPal, General Dynamics, GlaxoSmithKline, Norfolk Southern, Automatic Data, CME Group, Garmin, Moody’s, Steve Madden, Penske Auto Group, Hess, Aflac, Canadian Pacific Railway, Fortune Brands, Samsung

8:30 a.m. Advance economic indicators

2:00 p.m. Fed statement

2:30 p.m. Fed Chairman Jerome Powell briefing

Thursday

Earnings: Amazon, Merck, Comcast, Airbus, Anheuser-Busch InBev, MasterCard, Intercontinental Exchange, AstraZeneca, Hilton Worldwide, Northrop Grumman, Altria, Hershey, Yum Brands, American Tower, Gilead Sciences, Pinterest, Deckers Outdoors, First Solar, Beazer Homes, U.S. Steel, Molson Coors Brewing, Southern Co., Tempur Sealy, Textron, Nielsen, Valero Energy, Martin Marietta Materials

8:30 a.m. Unemployment claims

8:30 a.m. Q2 GDP

10:00 a.m. Pending home sales

Friday

Earnings: Caterpillar, Chevron, ExxonMobil, Procter & Gamble, Colgate-Palmolive, AbbVie, Booz Allen, Lazard, Church & Dwight, Johnson Controls, Illinois Tool Works, Cabot Oil & Gas, CBOE Global Markets

8:30 a.m. Personal consumption expenditures

8:30 a.m. Employment cost index Q2

9:00 a.m. St. Louis Fed President James Bullard

9:45 a.m. Chicago PMI

10:00 a.m. Consumer sentiment

8:30 p.m. Fed Governor Lael Brainard

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All-electric aircraft from Rolls-Royce completes maiden flight

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Matt Cardy | Getty Images News | Getty Images

Rolls-Royce’s first all-electric aircraft has completed its maiden flight, soaring across skies in the U.K. for around 15 minutes this week.

In a statement, the company said the aircraft’s trip on Wednesday marked “the beginning of an intense flight-testing phase” that would involve the collection of performance data on its electrical power and propulsion system.

According to Rolls-Royce, the airplane — dubbed the “Spirit of Innovation” — utilized a 400 kilowatt electric powertrain “with the most power-dense battery pack ever assembled for an aircraft.” Eventually, the firm wants the aircraft’s speed to exceed 300 miles per hour.

The Spirit of Innovation is the result of a program called ACCEL, or Accelerating the Electrification of Flight. Partners in the initiative include electric motor and controller specialist YASA and Electroflight, which Rolls-Royce described as an “aviation start-up.” YASA is a wholly-owned subsidiary of Mercedes-Benz.

In terms of funding, 50% has come from the Aerospace Technology Institute in partnership with the U.K. government’s Department for Business, Energy & Industrial Strategy and Innovate U.K.

In a statement issued alongside Rolls-Royce’s announcement, U.K. Business Secretary Kwasi Kwarteng said the aircraft’s flight was “a huge step forward in the global transition to cleaner forms of flight.”

Read more about electric vehicles from CNBC Pro

The environmental footprint of aviation is significant. According to the International Energy Agency, carbon dioxide emissions from aviation “have risen rapidly over the past two decades,” hitting almost 1 metric gigaton in 2019. This, it notes, equates to “about 2.8% of global CO2 emissions from fossil fuel combustion.”

Elsewhere, the World Wildlife Fund describes aviation as “one of the fastest-growing sources of the greenhouse gas emissions driving global climate change.” It adds that air travel is “currently the most carbon intensive activity an individual can make.”

Looking ahead, Rolls-Royce — not to be confused with Rolls-Royce Motor Cars, which is owned by BMW —said it would use and apply tech from ACCEL in products connected to the commuter aircraft and electric vertical takeoff and landing markets.

Alongside aircraft manufacturer Tecnam, Rolls-Royce is also working with Norway-headquartered airline Wideroe on the delivery of “an all-electric passenger aircraft for the commuter market.”

The last few years have seen a number of companies attempt to develop plans and concepts related to low and zero-emission aviation.

Last September, for instance, a hydrogen fuel-cell plane capable of carrying passengers took to the skies over England for its first flight.

The same month also saw Airbus release details of three hydrogen-fueled concept planes, with the European aerospace giant claiming they could enter service by 2035.

Back in 2016, the Solar Impulse 2, a manned aircraft powered by the sun, managed to circumnavigate the globe without using fuel. The trip was completed in 17 separate legs.

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Retail sales post surprise gain as consumers show strength despite delta fears

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Retail sales posted a surprise gain in August despite fears that escalating Covid cases and supply chain issues would hold back consumers, the Census Bureau reported Thursday.

Sales increased 0.7% for the month against the Dow Jones estimate of a decline of 0.8%.

A separate economic report showed that weekly jobless claims increased to 332,000 for the week ended Sept. 11, according to the Labor Department. The Dow Jones estimate was for 320,000.

Economists had expected that consumers cut back their activity as the delta variant continued its tear through the U.S. Persistent supply chain bottlenecks also were expected to hold back spending as in-demand goods were hard to find.

The pandemic’s impact did show up in sales at bars and restaurants, which were flat for the month though still 31.9% ahead of where they were a year ago.

However, sales were strong for most areas during the month, when back-to-school shopping generally results in a pickup in activity, especially so this year as schools prepared to welcome back students after a year of remote learning.

The headline number would have been even better without a 3.6% monthly drop in auto-related activity; excluding the sector, sales rose 1.8%, also well above the 0.1% expected gain.

With fears rising over the pandemic, shoppers turned online, with nonstore sales jumping 5.3%. Furniture and home furnishing also saw a healthy 3.7% increase, while general merchandise sales increased 3.5%.

Electronics and appliances stores saw a 3.1% drop, while sporting goods and music stores fell 2.7%.

The numbers overall reflected a more resilient consumer, with sales up 15.1% from the same period a year ago.

The retail upside surprise was tempered slightly with a disappointing read on jobless claims.

Initial filings increased 20,000 from a week ago after posting a fresh pandemic-era low. Still, the four-week moving average, which accounts for weekly volatility, declined to 335,750, a drop of 4,250 that brought the figure to its lowest point since March 14, 2020, at the pandemic’s onset.

The claims total came under heavy seasonal adjustments, as the unadjusted figure showed a drop in filings of 23,331 to 262,619.

Continuing claims also declined, falling by 187,000 to 2.66 million, also a new low since Covid hit. The four-week moving average nudged lower to about 2.81 million.

However, those receiving compensation under all programs actually increased just ahead of the expiration of enhanced federal jobless benefits. That total, though Aug. 28 and thus before the expiration, rose by 178,937 to 12.1 million.

In a separate economic report, the Philadelphia Federal Reserve reported that its manufacturing activity index rose 11 points to 30.7, representing the percentage difference between firms reporting expanding activity against those seeing contraction. That number was well ahead of the Dow Jones estimate of 18.7.

This is breaking news. Please check back here for updates.

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StanChart chairman still sees opportunity in China as regulations tighten

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Tourists visit the Bund waterfront area on May 10, 2021 in Shanghai, China.

Wang Gang | Visual China Group | Getty Images

But overall, I think China continues to be a tremendous source of opportunity for the private sector.

Jose Vinals

Chairman of Standard Chartered

“There’ve been some articles in the media about — is China becoming uninvestable? I don’t think so,” Jose Vinals told CNBC’s Hadley Gamble on Wednesday.

A number of sectors may be “a little bit more challenged now” and investors need to look more carefully at what investments they are making, he said.

“But overall, I think China continues to be a tremendous source of opportunity for the private sector,” he said, pointing out Beijing has slowly opened up its financial sector, granting some international firms access.

The regulatory crackdown in China has been interpreted differently by big names in the financial world, including Ray Dalio, George Soros and David Roche.

Inflation expectations

Separately, Vinals said he doesn’t expect inflation to be a big problem.

“I still subscribe to the view that inflation that we’re seeing in the United States and in other Western countries in particular … has an important transitory component,” he said.

Read more about China from CNBC Pro

Fed Chair Jerome Powell similarly believes that inflation will soon subside and has said he wants to see more strong employment reports before the central bank starts paring back its bond purchases.

Vinals said many Western countries are operating below their maximum economic potential, adding the Federal Reserve is likely to hike rates early next year.

“My baseline is that inflation will not be a big problem. But there is a risk that it may become more of a problem than we think,” he said, acknowledging that it would “complicate things” for the world.

“But I see [inflation] more as a downside risk to the global economic recovery, than as the base case for the economic outlook,” he said.

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