In this week’s edition of Market Week in Review, Consulting Director Sophie Antal Gilbert chatted with Senior Investment Strategist Paul Eitelman about predictions for third quarter earnings season, the impact of recent inflationary data on a potential December interest rate hike in the U.S., and the latest industrial production numbers from the eurozone.

Earnings growth expected to slow for Q3

With third quarter earnings season now underway, investors should be aware that earnings growth numbers will likely be lower than what was seen in many parts of the globe during the first two quarters of the year, Eitelman advised. “Consensus expectations for third quarter earnings growth are roughly 3.5% in the U.S., and 5 or 6% in Europe and Japan,” he said, noting that these same areas experienced double-digit growth during the first half of 2017.

While these projections would represent a clear step down from earlier in the year, a lot can be explained by energy prices, which were very depressed in the first part of 2016, Eitelman said. “The tailwind relative to last year, when energy prices were low, is starting to fade over time,” he noted, “and that’s now being reflected in year-over-year growth numbers.”

Eitelman noted that some of the very early results for the third quarter have been positive, with some of the large banks in the U.S. already beating expectations. Factoring in a range of positive economic indicators, Eitelman believes that when the dust settles, earnings growth for U.S. companies will actually come in closer to 6 or 7%.

Disappointing inflation data weighing on Fed

The minutes of the U.S. Federal Reserve (the Fed)’s Sept. 19-20 meeting were released this week, Eitelman said, revealing an evolution in the central bank’s views on continued weak inflation data. The Fed has become more concerned about core inflation in the U.S., Eitelman said, which continues to move away from its 2% target rate—despite a strong labor market. “Since June, the number of members of the Federal Open Market Committee who are worried about inflation has gone from a few to many,” he observed. In Eitelman’s mind, this makes the next two monthly inflation reports—the final ones ahead of the Fed’s looming December meeting—critical, as the bank debates a final interest rate hike to close out the year.

“Our view at Russell Investments on this is a bit apart from the industry consensus,” Eitelman said, “as we think that the inflation soft patch may cause the Fed to hold off on raising rates—although that’s not a slam dunk by any means.” He emphasized that he and the team of Russell Investments strategists see inflation weakness as a big deal—and that it’s clear the Fed is taking increasing notice of it.

Strong industrial growth across the Eurozone

Shifting to Europe, Eitelman discussed the eurozone industrial production numbers for August, which were pretty robust, he said. Year-over-year, production increased by nearly 4%, according to data from Eurostat—“a really strong result, and a continuation of the positive economic trends we’ve seen in the region recently,” Eitelman remarked.

The one caveat? The growth may have been inflated a bit by very strong numbers in the automobile sector, he said, noting that the summer months tend to be more volatile in that industry. “This means there’ll probably be a bit of a setback when the September numbers come in,” he said, “but it’ll be expected.” Overall, though, Eitelman sees the numbers as indicative of a strong August—and a continued strong 2017—across the eurozone.