Top 5 things to watch in markets in the week ahead

Investing.com -- It’s set to be a busy week in markets with U.S. inflation data on tap that could help cement expectations for a September rate cut. Earnings season kicks into high gear with the first of the mega caps and a swathe of European banks set to report. Meanwhile PMI data out of the eurozone will bring the path towards the next European Central Bank rate cut more sharply into focus. Here's your look at what's happening in markets for the week ahead.

1. PCE inflation data

U.S. inflation data on Friday will test market expectations that the Federal Reserve is all but certain to cut interest rates in September.

Economists are expecting June's personal consumption expenditures (PCE) price index to have climbed 0.1% for the second straight month, which would bring three-month annualized core inflation down to the slowest pace this year, below the Fed’s 2% target.

The consumer price index fell in June for the first time in four years. That cooler-than-expected report set off a rotation in equities and cemented market expectations that the Fed is primed to cut rates in September.

Several days after CPI, Fed Chair Jerome Powell said second-quarter inflation readings "add somewhat to confidence" that the pace of price increases is returning to the Fed's target in a sustainable fashion.

2. Earnings season gets into full swing

As earnings season enters high gear, bullish investors hope solid corporate results will stem a tumble in technology shares that has cooled this year’s U.S. stock rally.

The S&P 500’s technology sector has dropped nearly 6% in just over a week as growing expectations of interest rate cuts and a second Donald Trump presidency draw money away from this year’s winners and into sectors that have languished in 2024.

Second-quarter earnings could help tech reclaim the spotlight. Tesla (NASDAQ:TSLA) and Google-parent Alphabet (NASDAQ:GOOGL) both report on Tuesday, kicking off results from the "Magnificent Seven" megacap group of stocks that have propelled markets since early 2023.

IBM (NYSE:IBM), Ford (NYSE:F) and General Motors (NYSE:GM) are among some of the other big-name companies set to report during the coming week, with investors keen to hear companies’ insights on how strong the consumer is and how is the outlook for future economic growth.

3. European bank earnings

A European banking sector that's enjoyed a run of rising profits and share prices faces a reality check this week as second-quarter earnings season gets into gear.

Key to the outlook is net interest income, which surged because of rate hikes. However, the party may be short-lived as the ECB signals further rate cuts and the Bank of England prepares to ease monetary policy.

Investors will also want to see how lenders are faring as political uncertainty intensifies - French bank shares fell sharply during recent elections.

Wednesday will see earnings reports from major lenders like Deutsche Bank (NYSE:DB) (Germany), Lloyds Banking Group (LON:LLOY) (UK), BNP Paribas (OTC:BNPQY) (France), Banco Santander (BME:SAN) (Spain), and UniCredit (ETR:CRIG) (Italy).

Analysts say the read-across from U.S. firms that have already reported is that stronger investment banking revenues should boost lenders with large investment bank arms such as Deutsche Bank and Switzerland's UBS (NYSE:UBS), but any disappointment in interest income numbers could lead to negative market reactions.

4. Eurozone PMIs

While economic growth in the eurozone remains sluggish, strength in the dominant services sector, boosted by tourism, has kept price pressures uncomfortably high.

This has posed a challenge to the ECB, so PMI data on Wednesday will be closely watched after the central bank kept interest rates on hold at 3.75% last Thursday and resisted offering future guidance, saying it was "data-dependent."

The ECB, which lowered borrowing costs for the first time in five years in June, does see inflation moderating.

Markets are firmly pricing a September rate cut, supporting euro zone stocks, government bonds and the euro for now, but also raising the threat level of any PMI result that could shift the ECB's view.

5. Oil prices

Oil prices settled at their lowest level since mid-June on Friday as investors eyed a possible ceasefire in Gaza, while a strong dollar also weighed.

The war in Gaza has led investors to price in a risk premium when trading oil, as tensions threaten global supplies.

If a ceasefire is reached, the Iran-backed Houthi rebels could ease their attacks on commercial vessels in the Red Sea, since the group declared the attacks in support of Hamas.

Meanwhile, the U.S. dollar index climbed after stronger-than-expected economic data, pressuring oil prices.

A stronger U.S. currency dampens demand for dollar-denominated oil from buyers holding other currencies.

--Reuters contributed reporting