US stocks welcome “Retail Earnings Week”: Walmart (WMT.US) takes the lead, and the market is betting that the probability that the Fed will stay on hold in September will exceed 70%

The Zhitong Finance App notes that after a week full of concerns about inflation and questions about the Fed's next move, investors have ushered in a relatively calm five-day cycle. Financial reports from large supermarkets and other major retailers, as well as extensive manufacturing data, will be the focus of the market.

The S&P 500 closed up 0.4% last week, the Nasdaq Composite Index rose 0.6%, and the Dow Jones Industrial Average fell 0.6%.

The past few weeks have been very busy for investors. Leaving aside breaking news and major geopolitical developments, as summer comes to an end and children return to school, a relatively quiet week may be just what everyone urgently needs.

Although financial reports from large supermarkets will take up most of the company's calendar this week, it was the performance of Chinese tech giant Baidu (BIDU.US) that took the lead on Tuesday, and its AI cloud business revenue will be the focus of attention.

The retail industry publishes financial reports intensively

Thursday will usher in the centralized release of financial reports from major supermarkets. Walmart (WMT.US), Alibaba (BABA.US), ROST.US (ROST.US), and Deere (DE.US) will all announce quarterly results, followed by BJ Wholesale Club (BJ.US) on Friday.

In terms of economic data, manufacturing indicators will be a top priority. The US will release industrial output and manufacturing output data on Tuesday, and S&P's global US manufacturing PMI readings will be released on Friday. Additionally, the calendar also includes Tuesday's new home commencement data, which is expected to show a sharp downward trend, as well as the minutes of the last US Federal Bank meeting released on Wednesday.

The stock market is rising, and the mood is low

To put it bluntly, market sentiment is in a difficult situation.

According to the University of Michigan's preliminary consumer confidence survey, American consumers became more pessimistic about the economic outlook in August due to a decline in sentiment due to war, rising bond yields, and geopolitical uncertainty.

Joanne Hsu, head of the survey, said: “Although the decline in confidence at the beginning of the month was widespread among various population groups, the decline was particularly evident among older consumers, low-income consumers, and those without a college degree. These groups are all particularly vulnerable to the erosion of purchasing power caused by inflation.”

Prior to that, monthly consumer price index (CPI) and producer price index (PPI) data released by the US Bureau of Labor Statistics showed only moderate improvements in consumer and wholesale inflation data. According to the survey, only 8% of consumers expect their income growth to outperform inflation in the coming year.

This inflation data is enough for traders to cut their bets that the Federal Reserve will raise interest rates at the September meeting. Prior to the release of these data, given that the July employment report was far weaker than expected, the market's bet was basically five or five. Today, the market believes that the probability that the Federal Reserve will stay on hold is about 70%.

As another bearish sign, retail sales data also released by the US Department of Commerce on Friday showed that monthly sales fell 0.6% month-on-month, which is disappointing compared to the 0.1% increase expected by the market. This also continues to cause concerns about consumers' real purchasing power.

AI capital expenditure is colliding with the real economy

Now that the earnings season is coming to an end, new and larger predictions have emerged on the market about how much the giant cloud giants will invest in AI data center construction this year.

Goldman Sachs estimates that the global figure will reach $1 trillion by 2026. J.P. Morgan predicts spending on the US market will reach $697 billion. Bank of America Merrill Lynch, on the other hand, believes that there is a “path towards about 1.2 trillion US dollars” by 2027.

However, money alone won't solve the problem — because the bottleneck isn't funding at all.

Despite investments in new manufacturing capacity, chip shortages persist. The construction contractor stated that a lack of skilled labor prevented the project from being completed within the customer's expected timeline. Additionally, due to the public backlash against data centers, regulatory restrictions are increasing, including a year-long moratorium in New York State and an audit of electricity access in Texas.

And electricity is probably the biggest hurdle of all. Bloomberg New Energy Finance predicts that if it continues to grow at the current rate, the power gap for AI data centers will reach 19 gigawatts (GW) by 2035.

George Janarikas, an analyst at Code Ronghui in Ghana, said: “When you put all of these factors together — that is, data center companies' ambition to get the power they need to train their algorithms — we are convinced that this will never happen as fast as they expect.”

Wood Mackenzie recently reported that data center generators are trying to mitigate anticipated rejections by submitting multiple applications to different power companies. The energy analysis company said that due to these “fake” applications and applications submitted by less experienced operators, power companies and grid operators may approve only 28% of the electricity applied for.

The dollar is stuck between two forces

Rabobank's senior foreign exchange strategist Jane Foley pointed out in a report to clients last week that the US dollar is currently mired in a tug-of-war between oil prices and the Federal Reserve.

It all started when the old relationship between the US dollar and crude oil was broken.

Historically, crude oil has often moved in reverse with the US dollar. Crude oil is denominated in dollars, so a stronger currency puts pressure on commodities because it costs more for buyers to buy it.

Foley pointed out that this relationship began to change when Russia invaded Ukraine in 2022 and the US strengthened its position as a major energy exporter. As Iran's war disrupted shipping in the Strait of Hormuz, this shift became even more significant.

When did the rise in oil prices have almost been a clear negative impact on the US economy. However, the war in Iran, which triggered the biggest energy supply crisis in history, provided an opportunity for major US oil producers to expand production and profit from high oil prices, thereby boosting the country's energy exports.

Foley wrote, “As long as shipping through the Strait of Hormuz is restricted, the dollar may continue to maintain a safe-haven premium, supported by the US energy exporter status.”

However, there is another force in the market that opposes the dollar: the Federal Reserve. The far weaker than expected July non-farm payrolls report and relatively moderate July inflation data have prompted investors to lower their expectations for interest rate hikes, thereby removing a key source of support for the US dollar.

Of course, all of this happened after the US Treasury made a major intervention in the yen. Notably, as the White House tried to set a bottom line of support for the dollar, Treasury Secretary Scott Bessent chose to sell the euro instead of the dollar to buy yen.