Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

A few weeks ago, I was meant to go on a family vacation to Yosemite, but due to the wildfires up north, we were forced to postpone at the last minute. Since everyone was so looking forward to it, we decided to go somewhere a bit more local. While not as much of a destination as Yosemite, my wife found a place in Ojai for a couple of nights. The spontaneous trip to Ojai turned out to be a surprising amount of fun. I think one of the reasons we all enjoyed it so much was that expectations were low, and everything just worked out. The food was excellent, we did a fun nature hike to a waterfall, and the hotel was pet friendly – so even the pup enjoy himself!

Low expectations driven by historic levels of pessimism is one of the reasons the stock market had its best week in nearly two years. Everyone knows the economy is slowing and recession, whether it is this year or next, is a looming issue. However, when all those negative data are priced into markets, it doesn’t take much good (less bad) news to set off a relief rally. Between corporate earnings coming in better than expectations and the Federal Reserve rhetoric being perceived as less hawkish than feared, risk assets ratcheted higher.

Of course, one of the big headlines last week was that the US economy printed another quarter of negative GDP (Gross Domestic Product) growth. Real GDP fell at an annualized rate of 0.9% during the second quarter, following a Q2 decline of 1.6%. By some accounts, this fits the “technical” definition of recession. The convention within the United States is to say that a recession has occurred when the National Bureau of Economic Research (NBER) declares one took place. Given the strong labor market and other economic indicators, it is unlikely that the current backdrop will be declared an official recession.

With the 10-year Treasury yield down to just 2.6% and the Fed continuing its campaign to slow the economy by raising rates, an inverted yield curve is looking increasingly likely. Yield curve inversions (short-term interest rates above long-term) have had a perfect record of signaling recessions. However, it can take as long as two years to manifest.

It is clear that markets have priced in a lot of the impending economic slowdown. What is less clear, is whether markets have sufficiently priced in the decrease in corporate earnings that is likely to occur in the second half of the year. So far, earnings have come in better than expected, but as the economy continues to slow, we expect profit margins to come under pressure and earnings expectations to follow.

The jobs numbers that print on Friday will be an important data point to confirm that the labor market is starting to soften. We estimate July's payroll employment rose by 175,000. The unemployment rate should stay at just 3.6%. Average hourly earnings likely rose moderately. The Manufacturing PMI probably dropped to 51.0 in July. Any number above 50 indicates expansion. Finally, vehicle sales, after posting a better reading in June, should accelerate modestly to 13.2MM in July.

Aug 1 – Aug 5

Date	Indicator	Period
Aug 1	S&P U.S. manufacturing PMI (final)	Jul
Aug 1	ISM manufacturing index	Jul
Aug 1	Construction spending	May
Aug 2	Job openings	Jun
Aug 2	Quits	Jun
Aug 2	Rental vacancy rate	Q2
Aug 2	Homeowner vacancy rate	Q2
Aug 2	Real household debt	Q2
Aug 2	St. Louis Fed President James Bullard speaks
Aug 2	Motor vehicle sales (SAAR)	Jul
Aug 3	S&P U.S. services PMI (final)	Jul
Aug 3	ISM services index	Jul
Aug 3	Factory orders	Jun
Aug 3	Core capital equipment orders (revision)	Jun
Aug 4	Initial jobless claims	Jul
Aug 4	Continuing jobless claims	Jul
Aug 4	Trade deficit	Jun
Aug 4	Cleveland Fed President Loretta Mester speaks
Aug 5	Nonfarm payrolls	Jul
Aug 5	Unemployment rate	Jul
Aug 5	Average hourly earnings	Jul
Aug 5	Labor-force participation rate, ages 25-54	Jul
Aug 5	Consumer credit	Jun