Stocks end lower as oil pops; investors eye Fed minutes, retail earnings this week

Investing.com -- Wall Street on Monday ended lower, as traders took a breather after a record-setting week. Sentiment took a hit as oil prices rose amid little signs of a diplomatic breakthrough in the Middle East. 

The week ahead will be highlighted by the minutes of the Federal Reserve’s last monetary policy meeting and scheduled earnings from retail giants.

The benchmark S&P 500 index shed 0.5% to close at 7,748.14 points, the tech-heavy NASDAQ Composite declined 0.3% to settle at 26,644.91 points, and the blue-chip Dow Jones Industrial Average slipped 0.5% to finish at 53,460.02 points. Get premium stock market insights on InvestingPro - now 55% off

Inflation data powers Wall Street to all-time high 

U.S. stocks are coming off a mostly positive week in which the S&P topped 7,800 points for the first time ever. The return to record levels has been powered by a solid earnings season and a rebound in the technology sector. Sliding oil prices also helped, though crude benchmarks have climbed again recently as the Middle East conflict shows little signs of ending. 

The economic calendar was one of the primary drivers of sentiment last week, showing a moderation in annual consumer and producer inflation across both headline and core measures in July. Coming after an unexpectedly weak July nonfarm payrolls report, and coupled with a soft retail sales reading on Friday, the data together suggests some breathing room for the Fed in terms of not immediately tightening policy.

Interest rate odds reacted accordingly. As per the CME FedWatch tool, the probability of the central bank holding rates steady in September has increased to about 67%, while the chances of a quarter-point hike have fallen to nearly 33%.

"Inflation now sits at 3.4% – thankfully down from its three-year high earlier this year – and, in turn, Fed rate hike fears appear to have eased. On top of this, the S&P 500 is on for its strongest earnings growth since 2021," Yerbol Orynbayev, former World Bank governor of Kazakhstan, told Investing.com.

There will likely be some more insight into the central bank’s thinking later this week when the minutes of the Federal Open Market Committee’s (FOMC) July meeting will be published. Three regional Fed presidents had dissented with the FOMC’s move to hold rates steady, and watchers of monetary policy will be keen to see if there will be any more hawkish commentary in the minutes.

"Market participants’ reactions to Wednesday’s FOMC minutes will no doubt be viewed through the lens of the tame employment and inflation data. That said, three voters dissented at the July meeting having preferred to hike rates by 25bps. Indeed, one of those dissenters, Cleveland Fed President Hammack, reiterated her view that the Fed needed to raise rates even after seeing last week’s inflation data," Deutsche Bank analysts led by Justin Weidner said on Friday. 

"In other words, investors should not overly discount any hawkish leaning discussion in the minutes because of last week’s mild inflation data – clearly, it was not enough to sway at least one hawkish voice on the committee," they added.

Middle East impasse

It should also be noted that the deceleration in price pressures in July were driven in part by falling oil prices. But crude benchmarks have risen since, which likely means inflation will tick up again in August.

Oil prices gained more than 2% on Monday, with Brent crude futures, the global benchmark, trading above $90 a barrel after a nearly 6% surge last week.

The advance came as the U.S. and Iran continued to remain at loggerheads over the Strait of Hormuz. Both sides have independently asserted control over the vital waterway, while Tehran has demanded that Washington fulfill conditions such as ceasing hostilities across all fronts and unfreezing Iranian assets before the chokepoint can be reopened.

Meanwhile, Iran has been working on a framework for management of the strait with Oman. Fox News on Monday quoted President Donald Trump as saying: "If Oman gets in the way, we’ll bomb the s--- out of them."

Monday also marks the expiration of the memorandum of understanding signed between the U.S. and Iran in mid-June, which effectively collapsed in July after the two sides exchanged tit-for-tat strikes over attacks on commercial ships in the strait.

"Today, the U.S. and Iran’s 60-day truce expires, and it does so without a meaningful peace deal or plan of action for the Strait of Hormuz in place. To make matters more fraught, the U.S. has announced it intends to impose unprecedented economic measures against Iran. Tensions across Lebanon and Israel remain – it appears this conflict is far from over," Orynbayev, former World Bank governor of Kazakhstan, told Investing.com. 

"The fact is that the market will struggle to stabilise while this uncertainty looms. Yes, inflation cooled in July, but only a touch, and there is still time for the recent surge in missile strikes to show up in energy CPI readings. Any escalation in the conflict can easily send inflation ballooning again, renewing pressure on the Fed to hike rates, and deterring investment," he added.

Home Depot and Walmart to provide a look at the U.S. consumer

Away from the Middle East, the earnings calendar this week will be headlined by Home Depot and Walmart.

Home Depot, the world’s largest home-improvement retailer, is expected to deliver revenue growth despite greater consumer uncertainty and housing affordability pressure.

"While housing affordability and elevated mortgage rates remain headwinds, analysts believe Home Depot’s professional customer heavy business model will allow it to outperform peers. Recent data on shingles roofing shipments showed signs of stabilization, suggesting homeowners are finally getting around to fixing that leaky roof and making other urgent repairs," AJ Bell analysts said last week. 

Walmart, the world’s second-largest retailer, is also expected to report revenue growth. 

"Walmart has been gaining share among higher income householders trading down, so a key question for investors is whether this trend holds amid headwinds in its health and wellness business. Investors will be hoping to see continued strength across higher margin e-commerce, advertising and membership fees, which help reduce cost pressures in its grocery arm," the AJ Bell analysts said. 

Shares of Home Depot and Walmart have lagged the broader S&P 500’s 13.3% YTD gain, with the former down 2.1% and the latter up 2.5%.  

Other retail industry stalwarts like Target and Lowe’s will also be reporting results this week.

Ayushman Ojha and Scott Kanowsky contributed to this article