Q2 Earnings Season Begins

STOCK INDEX FUTURES

Stock index futures fell in the overnight session as markets brace for a week filled with economic data, second-quarter earnings, and renewed trade tensions. All major indexes fell to start the session Sunday evening following President Trump’s announcement on Saturday to impose 30% tariffs on the European Union and Mexico beginning August 1. Officials from the EU and Mexico have signaled a willingness to continue negotiations in hopes of securing a reduced rate. CPI data this week will add to uncertainty as markets continue to monitor signs of how inflation has impacted prices across the US economy and the implications for the Federal Reserve.

Earnings season kicks off this week with all major US banks due to report results. IPO and M&A markets have renewed investor enthusiasm in recent months. Data from FactSet published July 3 showed analysts are coming into second-quarter earnings season expecting 5% earnings growth for the S&P 500. Should this forecast come through, it will mark the slowest pace of profit growth since the fourth quarter of 2023. Second quarter earnings include President Trump’s “Liberation Day” tariff announcement, which seeded uncertainty in the market preceding a historic rally. Looking forward, in the third quarter, analysts are expecting earnings will grow 7.3% over last year. Full-year profit growth is expected to clock in at 9%, according to FactSet data.

Other data on economic activity includes June industrial production on Wednesday and June retail sales data on Wednesday. The University of Michigan’s July preliminary consumer survey on Friday will give a more up-to-date snapshot of consumer sentiment.

CURRENCY FUTURES

The USD index is little changed in the overnight session as markets digest the recent tariff announcements and brace for a week with important inflation data due Tuesday. President Trump announced a 30% tariff on the EU and Mexico, while officials from both countries signaled their intent to keep negotiations going. Reactions in the currency market to the news were largely muted. CPI inflation data will be scrutinized for insights into the impact tariffs are having on prices and the implications for Fed policy; higher-than-expected inflation could limit the dollar’s downside with higher expectations of a hawkish Fed.

Euro futures are little changed after briefly hitting a three-week low against the dollar in overnight trade after President Trump threatened 30% tariffs against the trade bloc. The EU said it would extend its suspension of countermeasures to US tariffs until early August and continue to push for negotiations. Markets have grown increasingly desensitized to tariff threats out of the White House. The EU’s decision to avoid tit-for-tat tariff escalation points to the bloc’s desire to avoid a spiraling trade war. The final estimate of eurozone inflation for June is due on Thursday. Provisional data showed annual inflation crept up to the European Central Bank’s target of 2.0% last month. Markets will be waiting on signals to see if the second round of tariff pauses has caused another round of frontloading or if production and exports have normalized.

British pound futures are lower as the pound sits close to three-week lows after Bank of England Governor Andrew Bailey made comments that signaled the central bank is prepared to make deeper interest rate cuts if the labor market weakens further. Bailey said the UK economy is underperforming its potential, creating slack that should help ease inflation, and reiterated that the rate path is “downward,” while leaving the door open to faster easing if conditions worsen. UK inflation data is due Wednesday; the figures are expected to attract close attention given the concerns about inflation being too high and economic growth too weak, and what it means for the BoE. Annual CPI inflation has risen in recent months and last stood at 3.4% in May, well above the Bank of England’s 2.0% target. Jobs data is due Thursday, and markets will watch for signs of weak employment growth and wage growth. Recent data has shown the economy contracted again by 0.1% in May. UK money markets price a 78% chance of a 25 basis-point rate reduction in August.

Japanese yen futures are little changed in overnight trade. Core machinery orders fell 0.6% month-over-month to ¥913.5 billion in May. While still in negative territory, the figure marked a notable improvement from April’s sharp 9.1% drop and came in better than the expected 1.5% decline. Data due Friday is expected to show that inflation continues to rise. Core consumer prices, excluding fresh food, are forecast to have increased 3.4% in June from a year earlier, compared to a 3.7% rise in May. Despite stronger inflation, uncertainty over the trade picture with the US means the Bank of Japan is unlikely to rush into an interest-rate hike. Trade data due Thursday may show a further slowdown in exports in June, after a 1.7% fall in May from a year earlier. On Friday, the BoJ is scheduled to conduct outright purchases in four sectors of the Japanese government bond market.

Australian dollar futures are lower as the currency weakened against the dollar following renewed fears over the global trade picture after President Trumps recent tariff threats. Markets will be watching Australian employment data due Thursday for signs of relief in prices as markets expect the Reserve Bank of Australia to cut interest rates in August, data dependent. The labor market in Australia has remained resilient over the past year, although worries of a slowdown have appeared in some forward-looking indicators. If the unemployment rate stays near its current 50-year low of around 4.0% and job growth picks up again, markets may begin to question the RBA’s capability to deliver a third rate cut in August.

INTEREST RATE MARKET FUTURES

Futures are higher at the front end and lower at the long end as markets await Tuesday’s CPI inflation data for June. Higher than expected inflation data could spur hawkish expectations about the Fed’s interest rate trajectory, potentially lifting yields and limiting the dollar’s downside. Bond markets will also be closely monitoring June industrial production data on Wednesday and June retail sales data on Wednesday. Strong data readings could send yields higher, while weaker data will point to a slowing economy and could send yields lower.

Economic adviser Kevin Hassett remarked that President Trump “can fire” Fed Chair Jerome Powell “if there’s cause,” stirring fresh speculation around the central bank’s independence.

The 10-year Treasury yield is 4.44%, and the 30-year yield is 4.98%. The spread between the two- and 10-year yields is 48 bps.

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