After a whipsawing week, stocks could face more volatile swings as investors assess new information on trade and the strength of the economy.
Some pretty important economic reports are coming, however, spread across the week, with CPI inflation data Tuesday, and a load of key reports Thursday, including retail sales, PCE inflation data, industrial production and regional Fed surveys.
But it is the behavior of the stock markets investors will be watching. It will be important to see how stocks react to variables like the level of Treasury yields and Chinese currency, which could be a bellwether for trade talks should the Chinese central bank allow the yuan to lose much more value.
Investors will also be watching to see what signal the stock market sends after outsized moves in both directions this week.
Sam Stovall, chief investment strategist at CFRA, said he believes the worst is over and stocks could trade at their highs again by the end of the month.
"I think what we went through was a retest of the May pullback and it ended up being successful," he said. Stovall said he has been watching the sub industries of the S&P 1500, and as of July 12, 91% were above their 50-day moving average, an unusually high number.
But as of Monday, when stocks were cratering, just 10% were above their 50-day moving average.
"That to me was an indication of a washout," Stovall said. He added that it was also a rapid move to the 5% decline level from the peak, indicating the market could make a quick comeback.
"We are probably coming out of this pullback, and we'll probably get there quickly. History says we'll get there by the end of the month, meaning by the end of the month we'll probably close with a new all-time high," he said.
Despite additional losses on Friday, stocks regained most of the steep losses from earlier in the week. The Dow ended the week down 0.75%. The S&P 500 and Nasdaq Composite finished the week down 0.5% and 0.6%, respectively. After Monday's close, the Dow and S&P 500 had plunged around 3% while the Nasdaq had lost 3.5%.
But in the bond market, investors may continue to see the lowest yields in years. In the past week, Treasury yields moved lower in a dramatic global slide amid concerns about global growth and as the world's central banks have been cutting interest rates.
"Trade tensions have unambiguously caused global growth to slow down, U.S. growth to slow and caused inflation to decelerate. That's quite clear. That's all the White House," said Ward McCarthy, chief financial economist at Jefferies.
Treasury yields went on a wild ride in the past week, with the 10-year dipping as low as 1.59% from as high as 2.08% the week earlier.
"We're in the crazy time of the summer ... when volumes are thin, moves tend to be exaggerated. That's probably what we should expect," McCarthy said.
Stocks reacted negatively to the move in yields and to a drop in the Chinese yuan below a former red line level of 7 per dollar. Bond yields, in terms of basis points, last moved this fast right after President Donald Trump was elected.
"As this things accelerate, the [bond] market has been dealing with known unknowns, and now you're starting to see people worrying about unknown unknowns. We're in dangerous territory," said McCarthy. "There' s a widespread perception that there's a race to the bottom going on here in yields, and it's not necessarily the U.S. that's driving this. It's the fact we're the high yielding market."
As rates also fall on foreign sovereign debt, U.S. Treasurys, with a higher yield, look more attractive and lure buyers. Rates move opposite price, so yields move lower when prices turn higher.
As for the Chinese currency, the market was surprised when China failed to defend it, allowing it to sink below 7 to the dollar. The move was seen as a reaction to the latest round of tariffs Trump threatened to impose on China, effective Sept. 1.
"It's really hard to make any kind of definitive material decision about what's going on in China because there's no verifiable data to work with," said Steve Massocca, managing director at Wedbush Securities. "If the Chinese really have the capability to keep this from blowing up, they're not going to let this blow up."
As for economic data, McCarthy said the CPI and retail sales data will be particularly important. "I think retail sales will be solid. Everything we see on the household side is good. CPI headline could be feisty. Gasoline prices will boost it by more than a tenth," he said.
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