Stock Bulls Remain Optimistic As Data Indicates a Slowdown in Manufacturing Inflation

Stock bulls remain extremely cautious but a bit more optimistic as data indicates a slowdown in manufacturing inflation. The Producer Price Index rose +11% year-over-year in April, higher than expected but a meaningful pullback from March’s +11.5%. Producer prices lead consumer prices, so the report is a good sign overall, though investors, as well as the Fed, will need to see a couple more months of declines before declaring that inflation is indeed cooling.

Inflation

Economists also warn that goods inflation may be coming down because consumer demand is shifting more to services, meaning high prices could simply be moving from one part of the economy to another. The latest data shows services prices are rising at the fastest rate in three decades with airfare leading the way. Even if inflation has peaked, the question now is, how long will it remain elevated?

Federal Reserve Chair Jerome Powell cautioned yesterday that he can’t guarantee the central bank can deliver a so-called “soft landing” for the economy, pointing to the tight labor market and ongoing supply chain dislocations. Powell also stressed that other “huge events” are playing important roles right now, including Russia’s war in Ukraine, that are beyond the Fed’s control. Powell made the comments after being confirmed by the Senate for a second 4-year term.

The central bank’s target inflation rate is still a “flexible +2%” but several officials have indicated that the new normal might be more in the +2.5% to +3% range. One of the main gauges (but not the only one) the Fed uses to determine the rate of inflation is the Core PCE Prices Index, which for March was running at +5.2%. The April read is due out on May 27, which is a couple weeks ahead of the Fed’s next meeting on June 14-15.

Data to watch

Consumer data recently has been sending mixed signals that are hard to interpret. Sentiment has been mostly falling since the start of the year but consumer spending has not shown any signs of pullback.

Next week, investors get an update on how spending is holding up via April Retail Sales on Tuesday. A slew of fresh housing data next week will provide a deeper look at how substantially higher mortgage rates might be impacting the market. The NAHB Housing Market Index for May is out on Tuesday, followed by April Housing Starts on Wednesday, and April Existing Home Sales on Thursday.

Several key earnings are on the calendar next week as well, including Home Depot and Walmart on Tuesday; Cisco, Lowe’s, Target, and TJX Companies on Wednesday; Applied Materials, Palo Alto Networks, and Ross Stores on Thursday; and Deere & Co. on Friday.

Stock Traders Embrace Themselves For Another Earnings Week

US Stock Markets Fundamental Analysis

Stock bulls are trying to gain back some of the recent losses as Q1 earnings season gets off to a mixed start. As for the war in Ukraine, President Biden announced another +$800 million in weaponry for Ukraine on Wednesday, following an hour-long phone call with the country’s president, Volodymyr Zelenskyy. Biden said the new weapons package will include systems already deployed to the fight, as well as new artillery weapons, artillery rounds, armored personnel carriers and helicopters.

Earnings in Detail

In the USA, the big earnings highlight last week was JPMorgan which posted a -42% profit decline from last year, slightly worse than analyst expectations. Details include more than -$500 million in losses due to market volatility tied to Russia, of which -$120 million is attributed to extreme price moves in the nickel market last month.

Somewhat surprisingly, JPMorgan also took a -$902 million charge that it added to its loan loss reserves, a stark reversal from last year when it released $5.2 billion from its reserves. Executives say it was a preemptive move to guard against the increased odds of a “Fed-induced” recession. CEO Jamie Dimon stressed that they weren’t predicting a recession, but that ongoing inflation, the war in Ukraine, and higher interest rates are “storm clouds on the horizon” that need to be taken into serious account.

At the other end of the spectrum is Delta airlines which topped both earnings and revenue estimates as well as offering an upbeat outlook for next quarter. The airline noted that passenger revenue was running at about 75% of its 2019 levels but expects that to rise to 93% to 97% in Q2.

The reads are for March, which marked the first full month of the Ukraine war and caused gas prices to skyrocket, two things expected to weigh heavy on Consumer Sentiment. I should mention that the producer price index rose +1.4% in March and 11.2% from a year ago. Energy prices were the biggest gainer for the month, rising +5.7%, while food costs increased +2.4%.

Data to Watch

This week the calendar is jam packed for earnings and economic data. On the earnings front, top highlights will include Bank of America, J.B. Hunt, Pinnacle Financial, and Synchrony Financial on Monday; IBM, Halliburton, Hasbro, IBM, Interactive Brokers, Johnson & Johnson, Lockheed Martin, Netflix, and Prologis on Tuesday; Abbott Labs, Alcoa, Anthem, ASML Holdings, Baker Hughes, CSX, Kinder Morgan, Las Vegas Sands, Nasdaq, Procter & Gamble, Randstad Holdings, Robert Half International, Spirit Airlines, Tesla, and United Airlines on Wednesday; Alaska Air, American Airlines, AT&T, AutoNation, Blackstone Group, Charles Schwab, Danaher, Dow, Freeport McMoRan, NextEra Energy, Nucor, PPG Industries, The Progressive, Qualtrics, Quest Diagnostics, Snap, SnapOn, Tractor Supply, and Union Pacific on Thursday; and American Express, HCA Healthcare, KimberlyClark, Schlumberger, and Verizon on Friday.

As for economic data, key releases include the NAHB Housing Market Index on Monday; Housing Starts on Tuesday; Existing Home Sales on Wednesday; the Philadelphia Fed Index on Thursday; and the preliminary reads on IHS Market Manufacturing and Services PMIs. Have a blessed Easter Monday!

Stock Markets: Top 3 Things You Need To Know This Week

Keep in mind, this week is the official start of the US corporate earnings season and at the same time, there is going to be a lot of economic and inflation data being released as well as the latest headlines regarding Russia’s war in Ukraine.

It is also a short trading week with stock, bond, and commodity markets closed on Friday for Good Friday, which could bring some added volatility as we get closer to the long weekend.

SP500 Earnings

Most Wall Street traders recognize that the S&P 500 rally off the March 2020 lows was built on extremely strong US corporate earnings power. Several traders and investors are quick to remind us that prior to the Covid outbreak S&P 500 company earnings were averaging around $40/share per quarter. Fast forward to our last earnings report that showed 2021 Q4 earnings and we see an average of $55/share. In other words, there was a +38% jump in earnings from before the pandemic to our last quarterly estimates, which puts us fairly in line with the current price level of the S&P 500. The question is can US corporate earnings continue to show growth?

I worry because interest rates are starting to aggressively creep higher, wage inflation is real, energy inflation is real, the cost of doing business is obviously higher and supply chain dislocations are still creating supply-side imbalances.

China in the Spotlight

Remember, China’s lockdown in Shanghai continues. The lockdown began on March 28 in half the city but has since expanded to its entire population of around 26 million. A trucker shortage and closures of warehouses in Shanghai are also affecting nearby provinces of Zhejiang and Jiangsu, according to a recent note from Citigroup analysts.

The two provinces are major manufacturing hubs that produce about one-third of China’s total exports. Shipping experts warn the fallout will start to be felt in the months ahead as severe dislocations once again drive up shipping costs and exacerbate shortages of raw materials and other essential supplies. There are also lingering concerns about energy prices as Europe continues to debate the possibility of banning Russian oil and gas supplies. Such a move could bring another dramatic rise in prices as available global supplies get spread even more thin.

Data to Watch

The Atlanta Fed is now forecasting just +1.1% Q1 US GDP growth, whereas, three of their last four Quarterly readings were all above +6.1%. At the same time, there are a lot more investors and economists also starting to walk back their global economic growth estimates. Several sources are thinking Ukraine’s economic output will likely contract by -40% to -50%.

More economists are also forecasting a double-digit reduction in Russia’s GDP, as well as much larger reductions in countries like Belarus and Moldova. Growth estimates in the Central Europe region i.e. Bulgaria, Croatia, Hungary, Poland, and Romania are also starting to be reduced.

There was also more talk over the weekend that Russia could eventually start to default on some of its “external debt” for the first time since 1917.

As for this week, all eyes will be on Consumer Price Index, scheduled for release Tuesday morning, and the Producer Price Index scheduled for release Wednesday morning. Both will work to add a bit more color to our current inflation debate.

Also on Wednesday, we get the first batch of Q1 earnings from a few big names like JPMorgan, Black Rock, Bed, Bath & Beyond, and Delta. Then on Thursday the trade will be digesting the latest Retail Sales data and another round of earnings from names like Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanely, and United Health Group.

Keep in mind, several of the largest US banks might be reporting their biggest slowdown in investment banking revenue in years, as more and more “deals” have been getting put on the back-burner. Who knows how long this slowdown will last?

For a look at all of today’s economic events, check out our economic calendar.

When Will S&P500 Find Direction?

I’ve heard a lot of technical talk that the S&P 500 could slosh around in this 4,200 to 4,600 range until it finds new direction.

Ukraine is still in the focus

The focus lately has been the war in Ukraine and the Federal Reserve, both of which continue to exacerbate investor uncertainty. While Russia shows no signs of backing off in Ukraine, there hasn’t been too much change on the ground as Putin’s assault seems to have stalled on several fronts.

In fact, some reports indicate Russia has actually lost a bit of ground in some areas. A few military and political experts say they see hopeful signs in a prisoner exchange that Ukraine and Russia conducted this week, though others remain skeptical that Putin is no where ready to strike a peace deal.

Many experts in the space say the biggest worry is with Putin’s army failing to meet his objectives, he could turn to other even more deadly tactics. The U.S. and EU have been more vocal with their warnings to Russia this week that the use of chemical or biological weapons will bring a strong response from the West. No details have been provided on what that might be and officials behind the scenes have said they are being “deliberately ambiguous” in order to keep Putin off-guard.

Can Fed control the inflation?

As for the Fed, fears are again rising that the central bank will not be able to cool inflation without damaging the economy, particularly with the additional challenges the war has created.

Fed watchers will get a slew of new data to chew on next week, including the PCE Pries Index next Thursday, which is one of the Fed’s favorite inflation gauges. The year-over-year rate in January rose to +5.2% from a previous +4.9% and most expect it will rise again in the February read.

With the Russia-Ukraine conflict compounding the raw materials crunch and Covid lockdowns in China showing signs of jamming up supply chains again, whatever the gauge shows next Thursday, it will likely climb higher in the months ahead. Investors get a look at the U.S. labor market next Friday with the March Employment Report. Consensus is calling for a gain of around +500,000 jobs after a gain of over +675,000 in February.

Investors will be focused more on the wage component which came in flat in January. That helped bring the year-over-year rate down a bit but wages were still up more than +5% vs. February 2021.

Wage inflation is very “sticky” so the higher labor costs climb, the more it limits how much price gains can ultimately moderate.

Data to watch

Other data next week includes advance reads on International Trade, Retail Inventories, and Wholesale Inventories on Monday; the S&P Case-Shiller Home Price Index and Consumer Confidence on Tuesday; the ADP Employment Change and final estimate of Q4 GDP on Wednesday; Personal Income and Outlays and Chicago PMI on Thursday; and ISM Manufacturing and Construction Spending on Friday.

On the earnings front, highlights next week include Chewy, Concentrix, Lululemon, and Micron Technology on Tuesday; BioNTech and Paychex on Wednesday; and Walgreens on Thursday. Russia’s war in Ukraine and the Fed’s war against inflation should remain in the spotlight…

The Big Food Worry… There’s no question food-importing nations are going to feel some major pain. In the USA prices at the grocery store more than likely continue even higher. The world is screaming for more acres and more production but supply chain dislocations along with Russia’s war in Ukraine has fertilizer and input prices sky-high and in some nations in extremely short supply.

Federal Reserve Meeting, War, New Lockdowns – What Drives Markets Now?

However, they still have a ways to go before being in positive territory for the year with the S&P 500 down -6.4%, the Dow down -4.4%, and the Nasdaq still sitting on a loss of -11.2%.

Federal Reserve meeting

With the long-awaited Federal Reserve March policy meeting out of the way, investors will now be listening closely for any clues regarding future policy moves from individual officials as they hit the speaking circuit this week.

Fed Chair Jerome Powell delivers remarks at the National Association for Business Economics today, then again on Wednesday at a summit hosted by the Bank for International Settlements. I should note, seven other Fed officials are scheduled to speak at various events this week.

Investors also remain focused on Ukraine war headlines where Russia’s assault seems to have stepped up in some areas. In fact, Russia has given Ukrainian forces a deadline of today to surrender control of the besieged port city of Mariupol, the scene of some of the heaviest fighting since Russia launched its invasion of Ukraine more than three weeks ago.

Ukrainian war

The eastern port city has been devastated by relentless shelling, with whole neighborhoods reduced to piles of rubble. Electricity, gas and water have been cut off and many remaining residents are without food. Ukraine’s armed forces said the situation was “difficult: there is famine in the city, street fights, people are trying to leave”. Some officials involved in ceasefire negotiations say the two sides have moved closer to an agreement, though they also said the same thing last week.

China’s top diplomat to Washington said his country is committed to de-escalating the war but global intelligence officials from the U.S. and EU continue to warn that China is considering military support to Russia. Shipments of U.S.-supplied weapons are supposed to be entering Ukraine within days, something Russia has vowed to disrupt and which would likely ratchet up tensions even further.

Obviously, it remains a very volatile and fluid situation and gaining accurate information is difficult as global powers keep their cards close to their chests. Interestingly, the Iran nuclear deal appears to again be a go as Russia has backed off some of its demands that had threatened to derail its revival. Negotiators now say they are “close” to a deal with some speculating it could come as soon as this week.

New lockdowns in China

This could put some nearby pressure on oil prices which have struggled a bit as of late thanks to worries about demand in China amid a wave of fresh Covid lockdowns.

China this weekend began relaxing some of the harshest restrictions in order to “minimize” disruptions but port backlogs are already happening. The Port of Shenzhen is said to have over +35 ships waiting to dock while outbound freight heading to the U.S. and other countries has slowed considerably due to numerous factory closures as well as a lack of trucks arriving as drivers face extreme travel restrictions.

Shenzhen includes the Yantian terminal, which handles about a quarter of all U.S.-bound shipments. Similar issues are being reported at other key ports, including Shanghai, the world’s largest. While this is likely to create more disruptions to the availability of some raw materials and other supplies, the upside is that it could allow U.S. ports to work through their own backlogs, particularly on the West coast.

ES ##-## (Daily) 2022_03_21 (2_22_07 AM)

SP500 overview

The accumulation and ADL are looking very good. With cyclical and seasonal bottoms coming soon, short-term sell-offs should be considered as buying opportunities. More strength should be expected if SP500 holds above 4600 – 4650 levels.

In conclusion

Today, there is nothing much of note on the economic data front but investors are anxious to hear from Nike, which announces earnings after markets close. The company’s fiscal third-quarter results will include the first two months of 2022 and provide some insights into how fallout from Russia’s war in Ukraine and the Covid lockdowns in China might be impacting multinationals. Nike’s forward guidance likely holds the most interest with investors particularly anxious about inventory flows for Nike as well as other companies with manufacturing operations in China.

For a look at all of today’s economic events, check out our economic calendar.

What Is Next for the Russian Economy?

The first round of peace talks between Russia and Ukraine failed to make any progress but the two sides agreed to meet again in coming days.

I’m not really sure if that means anything as Russia now has a 40 mile convoy of military equipment and troops headed directly for the Ukraine border. At the same time, most reports indicate that fighting on the ground is intensifying and that Belarus is now preparing to deploy troops to help Russia. It’s still not clear what impact the array of sanctions the West has slapped on Russia might have on global financial markets and trade flows but the Russian economy is already being wrecked.

Russian central bank

The Russian central bank more than doubled its benchmark interest rate to 20% as it attempted to curb a run on banks and stop the fallout in the Russian ruble. At least one major Russian bank is said to be on the brink of collapse.

Meanwhile, the Russian central bank faces being cut off from a large portion of its foreign financial reserves under new restrictions from the West which will make it tougher for Russia to defend its currency. Keep in mind, the Russian ruble fell -30% against the US dollar, making it now worth less than one cent.

Some economists predict the country could face a total economic collapse if the extreme measures are kept in place for very long. Russia is now said to be preparing countermeasures against countries supporting sanctions imposed by the U.S. and its European allies. Most experts think it’s unlikely that Russia will curb its oil or gas supplies as they account for a sizable portion of the country’s GDP. However, most Russia experts also agree that it’s hard to predict what Putin might do if he feels like he’s been backed into a corner and humiliated over his miscalculation that Ukraine would be an easy land grab.

Inflation in USA

The most immediate threat to the U.S. at the current moment is that the conflict will push inflation even higher and the Federal Reserve will eventually have to get more aggressive in its efforts to bring prices down, possibly pushing the economy into a recession.

A lot of bulls believe that the U.S. consumer is actually strong enough to weather a period of both elevated inflation and higher borrowing costs thanks to healthy savings and the strong increase in asset prices witnessed over the past year and a half. I question that perspective, as I’ve seen some recent data that shows the US consumers savings level is getting back to pre-Covid levels and the higher costs of energy and housing might soon start taking a bigger bite. In fact, many bears warn that inflation is already eroding savings as well as spending power with double-digit price gains for consumer goods adding an estimated $250 in expenses for the average American household.

Investors will be scrutinizing the ISM Manufacturing Index today for signs that factory level prices might be starting to ease. The gauge climbed in January after easing for two months in a row at the end of 2021. Construction Spending is also due today. On the earnings front, highlights include AutoZone, Dominos Pizza, Hewlett Packard, Hormel Foods, J.M. Smucker, Kohl’s, Ross Stores, Salesforce, and Target.

What Traders Have To Know To Start Their Week

Ukrainian-Russian negotiations

The good news, Russia is now agreeing to negotiate with Ukrainian President Volodymyr Zelensky “without preconditions”. The bad news, Putin ordered the Russian army’s nuclear deterrence forces to go on “combat alert”. According to a report from Russian state news operator TASS, Putin said he was giving the order because “top officials in NATO’s leading countries have been making aggressive statements against our country.”

A senior U.S. defense official, responding to those reports on Sunday said, “we have no reason to doubt the validity of this order. But how it manifested itself, I don’t think is completely clear yet.” “We believe,” the official added, “that this is not only an unnecessary step for [Putin] to take, but an escalatory one — unnecessary because Russia has never been under threat by the West or by NATO, and certainly wasn’t under any threat by Ukraine, and escalatory because it’s clearly potentially putting at play forces that if there’s a miscalculation could make things much, much more dangerous.”

At the same time, Germany is now saying because of Putin’s latest moves they are going to dramatically increase their military spending. In the past 48-hours there has also been a massive increase in global sanctions and banking restrictions against Russia. Many political and military leaders are saying this has turned into a massive miscalculation by Putin and the global blowback is perhaps much more than he may have anticipated.

Unfortunately, many worry that this might be like backing an opossum into a corner, where they tend to get very aggressive, pull out all their tricks, and make one last big stand. Let’s hope that doesn’t happen and that calmer heads prevail.

Sanctions

The other concern for the stock market is that this battle lingers on for an extended period of time and sanctions create larger global wrinkles and add more fuel to the already blazing inflationary fires. If banking sanctions get strong enough and are well supported globally it could crack the Russian ruble and cause massive hyperinflation inside Russia.

For what it’s worth, the ruble plunged in overnight trading by -28% to a fresh record low. Russia’s Central Bank is saying their banking system remains stable, yet rating agency S&P Global recently cut Russia’s debt rating to “junk” status. There are also talks that deepening banking sanctions against Russia may lead to some contagion or type of negative dominoing effect into other banks inside Europe and as well in other nations.

Wall Street bulls argue that all of this uncertainty and fear of global contagion will work to keep the Fed less hawkish and more likely to take a much slower approach towards raising interest rates.

In other words, the Fed knows the market is already spooked so they won’t want to make any sudden or unexpected moves that might cause some type of financial avalanche or stampede towards the exits.

Ultimately I think the market is most worried about “inflation” and how the Fed is going to turn their boat around in order to slow things down. Unfortunately, the situation with Russia has only made those matters worse and the Fed’s job even more difficult.

Most investors believe a rate hike of 50 basis points is more than likely off the table for the Fed’s upcoming March 15-16 meeting, with Wall Street widely expecting an increase of just 25 basis points. Unfortunately, however, there is little central banks can do to alleviate commodity supply shocks and the inevitable inflation effects that tend to follow. This has bears warning that much more aggressive Fed action is no longer a matter of “if” but rather “when.”

Data to watch

It’s worth noting that the PCE Prices Index, one of the Fed’s preferred inflation gauges, rose to a new 40-year high of +6.1% versus last year, with the core rate (excludes food and energy) at a new 38-year high of +5.2%.

Investors this week are very anxious to hear from Federal Reserve Chair Jerome Powell during his semiannual monetary policy testimony before Congress on Wednesday and Thursday. A few Fed officials last week said that the situation with Russia should not change the central bank’s plans to tighten policy but investors would like more insights as to how aggressive the Fed might be willing to get in its inflation fight.

Some of the more extreme hawkish views on Wall Street have been talking about the possibilities of price controls and/or raw material rationing, though most see such drastic measures as far fetched.

This week’s economic data highlight will be the February Employment Report on Friday with most expecting a gain of around +500,000 jobs. Today, economic data includes the Dallas Fed Manufacturing Survey as well as advance reads for International Trade, Retail Inventories, and Wholesale Inventories. Earnings of note include Lordstown Motor, Lucid, Novavax, Vroom, and Zoom Video.

Uncertainty Controls Wall Street

Investors are still unsure what to make of the situation in Ukraine. The U.S. and NATO say Russia is continuing to build its military forces near Ukraine while Russia says it has sent some troops home.

Russian military exercises with Belarus are scheduled to end on February 20. The closing Ceremony for the Winter Olympics in China also happens to be the same day.

If there isn’t some noticeable decrease in Russia’s forces at that time, military experts think the West will amplify the pressures they are trying to put on Russia but who knows?

FOMC “minutes”

Turning to the Federal Reserve, the release yesterday of “minutes” from the January policy meeting confirmed what most on Wall Street already suspected – the Fed is ready to move more aggressively in the upcoming tightening cycle than what’s been done in the past. The minutes said “most” members suggested a faster pace of interest rate increases than in the tightening cycle that began in 2015. Between 2015 and 2018, the Fed lifted rates by 25 basis points a total of nine times, and never more than once in a quarter.

Most members indicated they are comfortable raising rates at consecutive policy meetings, meaning there could be multiple hikes per quarter.

Members also indicated that reductions to the Fed’s balance sheet will likely begin this year by allowing maturing bonds to roll off, though some officials did say outright selling of mortgages may be necessary.

During the 2015 tightening cycle, the Fed didn’t begin reducing its holdings until 2017. Again, Wall Street has already been expecting the Fed to act much quicker this time around so the meeting “minutes” didn’t really provide any new insights. The details as to how high and how fast rates will be raised, and when and by how the balance sheet will be reduced won’t be answered until the Fed’s next policy meeting on March 15-16.

Investor expectations for the Fed’s next moves are already extremely hawkish with the CME’s FedWatch Tool showing traders think there’s a 50% chance that the central bank hikes rates by 50 basis points next month. That’s down from earlier this month but keep in mind, it was considered a nearly 0% probability at the start of 2022.

Bulls want to believe that “Fed Fear” is mostly priced in now and that stocks prices should remain flat-to-slightly higher until the central bank reveals more details. However, there are still two key reports coming up that could significantly impact sentiment – the February Employment Report on March 4 and February Consumer Price Index on March 10. If job growth and inflation surprise to the upside, it will again stoke fears about a more aggressive Fed. The underlying fear is that the faster the Fed moves, the higher the likelihood of a policy misstep.

Data to watch

Today, investors will be digesting January Housing Starts and the Philadelphia Fed Index. Earnings of note today include Airbus, Nestle, Nice, Orange, Palantir, Roku, The Southern Company, and Walmart.

U.S. and Russian Aircraft Flew Perilously Close to Each Other Amid Ukraine Tensions The Wall Street Journal Reported… U.S. and Russian aircraft operating in the Mediterranean Sea flew dangerously close to each other in three separate incidents over the weekend, including one in which the two nations’ aircraft came within 5 feet of each other, defense officials said.

The incidents, which occurred in international airspace Friday and Saturday, involved three Russian Su-35 jet fighters crossing into the flight path of three U.S. P-8A surveillance aircraft, the officials said, and come amid heightened tensions between the U.S. and Russia over Ukraine. At the same time there are some sources reporting that Russia is bringing even more troops to the Ukraine border while others are reporting a possible retreat… so the drama continues with no one really having a clear answer.

What Does Russia’s Threat Really Mean for Markets?

Russian officials maintain they have no plans to invade and say they are seeking a diplomatic way forward. Western officials don’t fully believe Russia’s claims, pointing to the continued military buildup along Ukraine’s borders. Both sides accuse the other of waging propaganda campaigns and Ukraine itself has made conflicting claims about how high the threat level really is.

Many Russian experts say that Russia’s economy won’t support an invasion of Ukraine and believe that Russian President Vladimir Putin is just trying to squeeze concessions out of the West.

Still, just the possibility of Russia’s oil supplies being interrupted has sent crude oil prices over +$95 per barrel with some insiders warning that an escalation in the standoff could send futures prices soaring to +$150.

Keep in mind, many oil insiders believe crude prices could top $100 per barrel in the near-term even without an armed conflict in Ukraine due to a growing supply deficit. Higher oil prices complicate the inflation fight that the Federal Reserve is now trying to battle.

Federal Reserve policy

While higher oil prices exacerbate inflation, there is nothing that central bank policy can do to impact oil markets. So we have a situation of higher oil prices adding to already high inflation at the same time that the Federal Reserve is preparing to raise interest rates.

Most economists fear this is a recipe for slower economic growth, possibly even recession.

When the Fed said inflation was “transitory” back in the summer of 2020 I doubt they were forecasting “delta” the major second wave of the virus and or forecasting the third “omicron” wave of the virus. I also doubt they thought about Russia and China aggressively flexing their muscles or perhaps even working to pour gas on the inflationary fires that are currently burning.

Nonetheless, here we are with investors talking about perhaps the start of an extended bear market in stocks, i.e. in 2000 the S&P 500 was down -9%, in 2001 it was down by another -13%, and ended in 2002 by tumbling another -23%. I’m certainly not saying we are going to repeat the dot.com bubble bursting but there is a chance we could continue to make lower highs and lower lows until the market is more certain about Fed policy and their rate of change and more certain about some of the geopolitical jockeying that could keep inflation hotter than some bulls have been forecasting.

St. Louis Fed President James Bullard told CNBC yesterday that the Fed needs to accelerate its pace of rate increases and repeated that he would like the Fed to raise its policy rate by 100 basis points by July. Bullard said previously that he supports starting with a 50-basis point rate hike in March and would like to see the central bank begin reducing its balance sheet by the end of Q2.

It’s worth mentioning that the “minutes” for the Fed’s January meeting will be released tomorrow which is guaranteed to be the most hawkish narrative to come out of the central bank since the start of the pandemic. It’s not likely to provide much in the way of clues as to what the Fed’s next move might be but it could provide some indication as to how many members are firmly planted in the aggressive policy tightening camp.

Data to watch

Today, bulls are nervous that the Producer Price Index could further stoke inflation fears if the gauge comes in higher than the +9.2% year-over-year rate that Wall Street is expecting. The December read did show signs of price pressures starting to ease but most of that was credited to lower energy prices in early December, which as we know have only marched higher since. Also due out today is Empire State Manufacturing.

Earnings today include Airbnb, Glencore, Invitation Home, Marriott International, Novozymes, Restaurant Brands, Roblox, ViacomCBS, and Zoetis. For full disclosure I still own shares and continue to be a long-term investor in Airbnb, Roblox, and Zoetis.

For a look at all of today’s economic events, check out our economic calendar.

What Moves the Stock Market This Week?

A new 40-year high read on consumer inflation last week now has Wall Street thinking the Fed might be even more aggressive with rate hikes. At the same time, investors continue to closely monitor the geopolitical headlines involving Russia and Ukraine. From what I’ve heard, there were a lot of diplomatic phone calls over the weekend, including one between Biden and Putin, but nothing seems to have changed in regard to Putin’s “poker face”.

Political tensions

Some military insiders continue to warn that Russia could now invade Ukraine at a moment’s notice. Some are saying it happens this week while others say Russia will invade after the Winter Olympics.

To add even more worry and concern, several geopolitical groups are thinking Russia and China are somewhat collaborating on strategy. This isn’t really anything new but the “buzz” and rumors are starting to get louder.

The big what if… what if Russia was to make a move on Ukraine and China a move on Taiwan in a coordinated effort? I don’t really think that happens but there’s always a possibility. Perhaps a more worrisome theory is Russia and China working together on economic warfare strategies to knock the US dollar out of its leadership role as the world’s currency.

Russia has a good hold on energy supply and China is the world’s biggest influence on the global supply chain. If Russia can withhold energy and China slows the supply chain, theoretically they could create a major wave of inflation. If at the same time, they continued to dump US Treasuries in a big way they could weaken the US dollar enough to bring into question its role as the world’s reserve currency, especially with our debt level so elevated.

The theory continues… if the US dollar was to weaken enough some exporting countries and global businesses might start to question the value of their goods being sold at a discount when the transaction is settled in US dollars.

Hence more longer-term economic concern.

Interest rate hikes

More large Wall Street insiders are talking about perhaps +5 to +7 Fed rate hikes ahead in order to slow domestic inflation. The big questions remain… how fast will the Fed shrink its balance sheet and how long before they will stop raising interest rates? St. Louis Fed President Bullard last week expressed support for a 50-basis points hike, though several other Fed officials have since argued against the idea.

Fed speculation has also brought increased volatility to bond markets with yield on the 10-Treasury topping 2% on Thursday but ending Friday a full 10-basis points lower. The 2-year yield saw its biggest one-day move since 2009, surging 26 basis points at one point on Thursday. Those are pretty dramatic swings for bond markets and highlights the extreme level of uncertainty that is plaguing financial markets.

Just keep in mind however, from the summer of 2016 to the fall of 2018, 10-year Treasury yields jumped from 1.4% to over +3.0% yet the NASDAQ was still able to increase by over +45%.

On the energy front, there continues to be talk of tighter global oil supply and higher prices ahead especially if we see military action between Russia and Ukraine. Remember, increased energy costs can quickly spread through an entire economy as manufacturers pass along higher production and transportation costs in the form of higher consumer prices. Consumers also get dinged at the gas pump as well as with higher heating and cooling costs.

With inflation already smoking hot at +7.6% and Consumer sentiment starting to waiver the market is starting to get more nervous about higher energy costs. Worsening consumer sentiment can be an early warning signal of a decline in consumer spending. However, bulls still largely expect a boost in consumer spending as the Omicron Covid wave continues to fade, pointing to the massive amount of savings and increased asset values that consumers have accumulated over the past couple of years.

Most believe that spending will shift more toward “services” and away from goods, which in turn is expected to help further ease some of the strain on supply chains and start to cool prices. Supply chains have shown slow but steady improvements, especially in the last couple of weeks as Covid cases have plunged, which most economists think will should start slowing the rate of monthly inflation gains.

By March, inflation reads will be up against much higher year-ago data which should also help to bring down the rate of monthly increases, at least in theory. And if inflation starts showing signs of coming down on its own, that would likely decrease pressures on the Federal Reserve to resort to more aggressive tactics to tame inflation.

There is no major economic data today but investors are anxious about the Producer Price Index for January due out tomorrow. The bigger economic headlines this week include inflationary data out of China and US retail sales on Wednesday morning.

The Fed FOMC minutes are also being released Wednesday afternoon. The earnings this week include Airbnb and Roblox on Tuesday; Cisco, Nvidia, and Shopify on Wednesday; Palantir and Walmart on Thursday; and Draft kings and John Deere on Friday.

Inflation: The Fed’s Guiding Light and the Biggest Worry for Investors

While indexes did manage to make small gains yesterday, they remain in negative territory for the year. The “buy-the-dip” trading mentality that helped indexes swiftly rebound from downturns the past couple of years has mostly been smothered by uncertainty about Federal Reserve monetary policy in the months ahead.

In other words lots of people are freaked out and a bit nervous about how stocks might perform in a rate hiking environment.

Just keep in mind, from June 2004 to June 2006 Fed Funds went from 1.00% to 5.25%. There were a total of 17 rate increases across this period, each 25 basis points and stocks did not get hammered.

Inflation

Today, inflation seems to be the Fed’s guiding light and investors are extremely concerned that data between now and the central bank’s next meeting on March 15-16 will fail to show any signs that price pressures are easing. That’s largely due to fallout from the Omicron Covid wave that further exacerbated supply chain dislocations and labor shortages.

Those two issues have been key drivers of escalating inflation which has pushed higher nearly every month since June of 2020. The only exceptions are October, when CPI came in flat, and November when it dipped a puny -0.1%.

Data to watch

Upcoming data to watch includes the January Consumer Price Index (CPI) tomorrow, the PCE Prices Index for January on 2/25, the February Employment Situation on 3/4, and March CPI on 3/10.

Today, investors will be scrutinizing the Energy Information Administration’s Petroleum Status Report. The report last week showed an unexpected decline in U.S. crude inventories, as well as raw oil at the Cushing, Oklahoma delivery point for WTI. Cushing inventories stood just above 30 million barrels as of January 28—down from 60 million barrels at the start of 2021, and down from 37 million barrels at the end of 2021. U.S. distillate levels are particularly concerning, with inventories as of January 28 falling to the lowest seasonal level in eight years.

The low inventories, which were -26 million barrels (-17%) below the pre-pandemic five-year average, are likely the result of booming manufacturing and freight demand. The American Petroleum Institute yesterday estimated that distillate inventories declined last week by -2.2 million barrels while U.S. crude supplies likely dipped by over -2 million barrels.

Most oil insiders believe the world oil market is under-supplied with OPEC+ struggling to meet production targets and economic activity rapidly rebounding from the Omicron wave that swept the entire globe.

Analysts think that signs of easing tensions between Russia and the West could stall the current rally in oil prices but it will likely only be temporary as supply concerns escalate.

On earnings front, today’s highlights include Bunge, Cerner, CVS, Disney, GlaxoSmithKline, Honda, Mattel, MGM Resorts, Motorola, O’Reilly Automotive, Toyota, Twilio, and Uber.

Top 4 Things Traders Have to Know Today

What is happening with Meta, Paypal and Spotify?

Spotify didn’t actually issue annual guidance, which seems to have exacerbated worries about potential subscriber growth potential. All three were down by double-digits in after hours trading at one point last night.

Competition is clearly much more fierce as larger players are starting to dial it in and use the latest technology to gain better traction i.e. Visa, Mastercard, etc. I also read reports this week that Apple is diving deeper into the payment and banking space and will soon be able to offer all kinds of options via the smartphone.

In simple terms, I wonder if PayPal executives could see they had a “growth” problem and that’s why they took a look at Pinterest a few months back. I heard rumors yesterday perhaps they might be looking at Robinhood.

At the moment the stock market just doesn’t seem real forgiving to those who swing and miss. On a somewhat positive note, Facebook disclosed they purchased back +$20 billion of their own stock in the last quarter.

Bulls are hoping for solid results from Amazon and Snap today to help prevent sentiment in the tech sector from creating more fallout. I’m not holding my breath!

Data to watch

Results are also due from Activision Blizzard, Biogen, Carlyle Group, Check Point, Cigna, Clorox, ConocoPhillips, Deckers Outdoors, Eli Lilly, Estee Lauder, Ford, Hanesbrands, Hershey, Honeywell, Ingredion, Merck, Pinterest, Quest Diagnostics, Royal Dutch Shell, SnapOn, Wynn Resorts, and Xylem.

On the economic data front, Factory Orders, the ISM Non-Manufacturing Index, and Productivity and Costs are due today. Productivity and Costs has become a more closely watched report as worries about climbing wages have grown. In the third quarter, productivity fell -5.2% (the most since 1960) and labor costs rose +9.6%.

Obviously, weakening productivity and rising costs is a bad combo for corporate profits so reversing this trend is a high priority. It may be tough to find much relief in the near-term with the labor market expected to remain extremely tight.

The shortage of workers has also been exacerbated by the latest Covid wave. ADP’s private payrolls report yesterday showed a decline of -301,000 jobs for January versus the estimate for a +200,000 gain, the first reported net job less since December 2020 according ADP.

Covid issue

Most analysts blame last month’s Covid surge for the decline and expect it is just temporary. The official January Employment Report on Friday is expected to show a gain of around +150,000 jobs, though the government has warned that the data won’t be reliable due to Covid-related reporting problems. Hopefully we’ll soon stop hearing that excuse as the Omicron Covid wave does seem to be burning itself out in the U.S. Case numbers across the country are about half of what they were in mid-January.

Hospitalizations have finally started to come down, too, which experts say is a more reliable measure. I hate to mention it but health officials are currently monitoring a mutated strain of Omicron known as “BA.2″… when does it end?

The standoff between Ukraine and Russia

Also still on the radar is the standoff between Russia and Ukraine. The U.S. is now readying to send more than +3,000 troops to bases in Eastern Europe as new satellite images appeared to show an even further increase in Russian troop buildup on Ukraine’s borders. Whether or not war is a realistic threat or not, the climbing tensions continue to stoke the flames in the energy markets.

Brent crude futures are trading near $90 as OPEC struggles to meet production targets and global physical supplies continue to tighten. The 19 OPEC+ countries with quotas underperformed their production targets by -832,000 b/d in December. Russia is currently the top OPEC+ producer, so any disruption to those supplies runs the risk of shooting oil prices even higher. Take note the front-end of the natural gas market is up over +50% in the first month of the new year. It’s certainly going to be a wild ride in 2022!

 

Brace Yourself For Another Wild Month In Stock Markets

For the year, the Dow is down -6%, the S&P 500 is down just over -9%, and the Nasdaq has lost -14.7%. The previous record-holder is January 2009, an ugly moment for the economy, when the stock market fell -8.6%. In addition, the VIX – aka the CBOE Volatility Index – has actually dropped back to around 31 after topping 37 earlier this week, its highest point since November 2020.

Keep in mind, the index isn’t registering anywhere close to levels reached during other periods of “extreme” volatility. For example, the index, which is measured between zero and 100, hit its highest point of almost 83 during the financial crisis in 2008. Its most extreme point during the pandemic was around 66 in March 2020. So, by comparison, this week’s volatility has been rather mild.

Federal Reserve

Some insiders equate the wild swings in stock prices to investors, particularly “big money,” trying to establish a new baseline for stock valuations minus the Fed’s easy money policies that have driven a massive amount of cash into markets since the pandemic began in 2020.

At its height, the Fed was pumping as much as +$120 billion per month into the system via its asset purchase program, ballooning its balance sheet to now nearly $9 trillion.

At the same time, the Fed has held its benchmark rate at near-zero and, before that, hadn’t even attempted to raise rates since 2018, and then only briefly. The last full-cycle of rate hikes was 2015. What’s more, investors haven’t really had to factor for inflation since the early 90s and it hasn’t been this high since the 80s.

Bottom line, whatever the new “normal” ends up looking like, it will be dramatically different from the pre-pandemic investing landscape. I’ve heard several large stock traders saying it seems to be the return of Alpha instead of the race to levered Beta. I hear others on Wall Street referencing it to a bit of league recreational youth baseball team where everybody now gets an award simply for participation, but then kids run into a rude awakening when performance really starts to matter.

It feels like we are there in the stock market; every business that was coming into the market was simply being rewarded with participation points, now people are starting to keep a real scorebook and counting the strikeouts and runs scored.

Economy still roars

The good news is that the U.S. economy continues to roar. Historically, a combination of moderate inflation and moderate interest rates has led to some of the biggest boom times for U.S. Last week, the Commerce Department said Q4 Gross Domestic Product (GDP) grew at an annualized rate of +6.9%, stronger than Q3’s +2.3% and well above Wall Street expectations of around +5.7% growth.

Consumer spending climbed at a +3.3% annual pace led by a +4.7% increase in services spending. But the real stand out was private investment which rocketed +32% higher, boosted by a surge in business inventories as companies stocked up to meet higher customer demand. Rising inventories, in fact, contributed nearly +5% to Q4 GDP growth.

On the one hand, the inventory build is positive because it indicates an easing of supply chain dislocations that should in turn help with inflation pressures. On the other hand, many economists note that the big boost from retailer and wholesaler restocking is not likely to be repeated.

Companies will also likely start to unwind at least some of that inventory in the quarters ahead, which could drag overall 2022 GDP, especially if consumer spending also drops off. And investors are more closely tracking consumer behavior as inflation continues to rise.

With consumer spending accounting for about 70% of the U.S. economy, any signs that belts are tightening or moods are getting overly pessimistic will likely set off some alarm bells.

Data to watch

Turning to next week, it will be another busy one for both key economic data as well as earnings. The main economic data highlight will be the January Employment Situation on Friday. Other key data includes ISM Manufacturing, Construction Spending, and the JOLTS report on Tuesday; ADP’s private payrolls report on Wednesday; Productivity & Costs, Factory Orders, and the ISM Non-Manufacturing Index on Thursday.

Earnings wise, results are due from NXP Semiconductor and Trane on Monday; Advanced Micro Devices, Alphabet, Amgen, Chubb, Electronic Arts, Exxon, General Motors, Gilead Sciences, Match Group, PayPal, Sirius XM, Starbucks, and UPS on Tuesday; AbbVie, Aflac, Allstate, Boston Scientific, CNH, Corteva, D.R. Horton, Ferrari, Humana, Johnson Controls, Meta (Facebook), MetLife, Novartis, Novo Nordisk, Qualcomm, Siemens, Thermo Fisher, TMobile, and Waste Management on Wednesday; Activision Blizzard, Amazon, Biogen, Carlyle Group, Check Point, Cigna, Clorox, ConocoPhillips, Deckers Outdoors, Eli Lilly, Estee Lauder, Ford, Hanesbrands, Hershey, Honeywell, Ingredion, Merck, Pinterest, Quest Diagnostics, Royal Dutch Shell, Snap, SnapOn, Wynn Resorts, and Xylem on Thursday; and BristolMyersSquibb, CBOE, Phillips 66, Regeneron, and Sanofi on Friday.

Bottom line, brace for another huge week of extreme volatility.

Is Stock Market Decline Done for Now?

A decline of -10% or more from the most recent peak is considered a “correction”.

Some Wall Street bulls are noting a decline in bond yields yesterday that they believe indicates the recent selloff may have played itself out. Bears, however, suspect the yield dip is just a blip on the radar with many still predicting 10-year yields will top +2% by the end of the first quarter and perhaps ultimately push towards 2.3% to 2.55 before topping out.

“Bubbles” driven by the Fed’s easy-money policies

The pullback in stock prices has created a more “risk off” mentality that has also bled into other alternative assets like cryptocurrencies that bears believe are massive “bubbles” driven by the Fed’s easy-money policies.

New and ongoing issues that threaten to contribute or extend existing inflationary pressures in 2022 have led to some dramatic recalculations of the Federal Reserve’s upcoming tightening cycle, in turn increasing the downward pressure on more rate-sensitive stocks.

As recently as early-December, most Wall Street insiders were anticipating the Fed would increase rates four times, in increments of 25-basis points. Now, expectations are growing for two hikes of 50-basis points, along with perhaps two hikes of 25-basis points. There has also been some speculation that the initial rate hike, which is expected in March, could be one of the larger 50-basis point moves, an outcome that some worry could send shockwaves through global financial markets.

Another dramatic shift is the expectation that the Fed will begin reducing its nearly $9 trillion balance sheet this year, which Wall Street at one point expected to begin no sooner than 2024.

The Fed meets next week on January 25-26. Ahead of that, investors are anxious to see policy updates from other global central banks, starting today with Bank of Canada, then the European Central Bank on Friday. Bank of Canada is widely expected to hike its benchmark interest rate amid unrelenting inflation similar to what we’ve witnessed in the U.S.

The ECB, on the other hand, is expected to maintain its current policy, with most officials still betting inflation will recede with the pandemic. Unfortunately, current signs point to even higher global energy prices ahead, which will ultimately translate to higher gasoline prices for consumers, as well as higher operating costs for businesses that will also likely get passed along.

Oil prices rose again yesterday after a pipeline explosion that will temporarily halt some exports added to existing disruptions and global supply concerns.

The latest data shows that global oil inventories have continued to shrink into 2022 as several OPEC+ members struggle to meet their production increases.

Data to watch

Today, economic data includes the Philadelphia Fed Index and Existing Home Sales for December. It’s worth noting that December Housing Starts and Permits data released yesterday both came in far above trade expectations.

November numbers were also revised upward. Earnings releases include American Airlines, Baker Hughes, CSX, Netflix, PPG, The Travelers Company, and Union Pacific. Next week we’ll start getting into the big tech giants and other corporate bellwethers like Apple, Boeing, Caterpillar, IBM, McDonalds, Microsoft, Tesla, and Verizon.

Some bullish insiders suspect good results from just a few of America’s leading companies could lure investors back in, possibly setting the stage for a massive rebound, especially if the Fed delivers a less hawkish than expected policy update next week.

On the flip side, many are worried that if Apple, Microsoft, or Tesla were to roll over it could trigger a sizable selloff. I think we are clearly at an inflection point with the Fed changing direction and over 40% of our fund and money managers being too young to ever trade or invest in both a rising rate and rising inflation environment. It will be interesting to see how some chose to navigate these waters.

Earnings Season Brings Worries to Wall Street

What is wrong with the banking sector?

Goldman Sachs yesterday became the latest to fan worries about declining profit margins after the bank reported a +33% jump in compensation which contributed to a -13% decline in Q4 profits.

The escalating costs mirror similar results disclosed by fellow big banks JPMorgan and Citigroup, as well as numerous other companies that have already reported or issued earnings warnings in recent weeks.

Just over 4% of S&P 500 companies have released Q4 earnings, and about 60% of those have cited a negative impact from higher labor costs on current and/or expected future earnings.

10-Year Treasury yield

Stock prices are also facing headwinds from a big jump in bond yields. The 10-Year Treasury yield hit 1.88%, the highest since before the pandemic hit and up from a low of 1.36% in early December.

This is largely a reflection of the U.S. Federal Reserve’s more hawkish monetary policy shift that is widely expected to now bring four or five interest rate hikes in 2022. However, there is a lot of uncertainty surrounding the exact timing and degree of those hikes, with many on Wall Street worried that ongoing labor market tightness, supply chain disruptions, Covid-related shutdowns, and geopolitical tensions will continue to drive costs even higher.

That in turn would likely mean even more aggressive action from the Federal Reserve.

There’s a lot of talk that the 10-Year could eventually push to 2.3% or even 2.5%. the market had to deal with a similar jump in the 10-Year back in 2013 during the “Taper Tantrum” or when the Fed had to start reversing their easing policy that had been associated with the US housing crisis global market meltdown.

If you remember, the stock market went through a fairly rough patch that year as the Fed shifted policy but eventually the market selloff stabilized and stocks rebounded to have a good year. this time around, however, many Wall Street insiders are talking about how the double whammy of escalating costs and higher interest rates is driving a shift away from so-called “momentum” stocks and back toward old school investment fundamentals.

Meaning investors are turning away from hot, trendy stocks that have defied gravity-and lacked profits-in favor of companies with proven track records and good cash flows.

Inflation fears are also once again being exacerbated by the oil market with prices hitting a seven-year high, the highest level since October 2014. The latest jump stems largely from deteriorating relations between fellow OPEC members after Yemen’s Iran-aligned Houthi group attacked the United Arab Emirates overnight on Monday. A Saudi-led coalition retaliated with airstrikes on the Houthi group. The renewed tensions between the UAE and Saudi Arabia raise the risk of more disruptions to the already tight global oil supply outlook.

Data to watch

Today, investors will be digesting Housing Starts and Permits for December, both of which are expected to pull back slightly from last months results.

On the earnings front, today’s highlights include Alcoa, Bank of America, Discover, Fastenal, Kinder Morgan, Morgan Stanley, Procter & Gamble, State Street, United Airlines, United Health, and U.S. Bancorp.

I still think there’s some rough sailing and uncertainty in the waters ahead… Also keep in mind, the Nasdaq 100 is quickly approaching its 200-Day Moving Average. Bulls want to argue that we are going to see a big bounce higher once we test that level. Bears argue that a close below that level could bring on a wave of heavy computer based technical selling. I’m not sure who is going to come out correct but I expect we see some extremes as the battle plays out… stay nimble!

Think About This… Perhaps +40% of fund managers have never traded or invested in a rising rate and rising inflation environment.

For a look at all of today’s economic events, check out our economic calendar.

In The Spotlight – Big Wall Street Banks as the Main Power in S&P 500

Banks’ earnings

Big Wall Street banks are in the spotlight right out of the gate with Goldman Sachs set to release results before markets open. They will be followed by Bank of America, Morgan Stanley, and U.S. Bancorp tomorrow (Wednesday). Bank results got off to a mixed start on Friday. JPMorgan Chase, Citigroup, and Wells Fargo all topped profit estimates for Q4 but JPMorgan and Citi delivered disappointments in other areas.

In particular, investors are nervous about higher expenses that cut into Q4 profits for both JPMorgan and Citi and which both banks forecast would continue to weigh on results in 2022. JPMorgan and Citi also saw -11% decreases in trading revenue, with fixed income trading down by double digits for both.

There are also signs of slowing loan growth that some analysts worry is an early sign of slowing consumer demand for big-ticket items as inflation continues to climb. While banks will eventually benefit from higher U.S. interest rates that are anticipated in the year ahead, a big pullback in consumer lending is a threat to some of the more lofty Wall Street expectations had for the sector in 2022.

Global economy

Globally, not a lot changed over the extended weekend. China might have provided a bit of a surprise with additional monetary easing into a struggling GDP and sagging real estate prices. It’s worth noting, Omicron has now been detected in Beijing for the first time, just three weeks before the city is due to host the Winter Olympics. Now the Chinese are shutting down and suspending the sale of Olympic tickets to the public.

Tensions remain heated between Hong Kong activists and Chinese government officials. North Korea launched its fourth missile test this month. After North Korea’s missile test last week, the US announced sanctions on eight North Korean and Russian individuals and entities for supporting North Korea’s ballistic missile programs.

Tensions between the U.S. and Russia seem to be headed in the wrong direction with Russia over the weekend moving troops and equipment into Belarus for joint military exercises.

The so-called “Allied Resolve” drills are set to take place near borders with NATO members Poland and Lithuania, as well as Ukraine where Russia has maintained its alarming military presence.

Most U.S. military experts don’t really think Russia has any real intentions of invading Ukraine or any other EU country. However, Western countries also have increased their military presence along borders and other strategic locations which increases the chances that a broader conflict could “accidentally” be sparked.

Europe’s gas supplies are also at risk as Russia continues to dangle the threat of cutting them off. Most of the tension stems from Russia’s demand that former Soviet countries be barred from entering NATO, something the U.S. and other NATO allies have refused.

In the USA, we are heading deeper into earnings season and investors are going to be paying close attention to costs and expenses. As I mentioned, late last week, JPMorgan warned that higher expenses and higher spending on hiring in 2022 could create some headwinds.

Looking ahead, it will be interesting to see how many executive teams start providing guidance and warnings that corporate expenses are rising faster than anticipated and what if any damage will be due to profit margins?

Remember, some companies have said they are passing the additional rising costs on to the consumer while other companies are eating a majority of the higher expenses in an attempt to gain more market share.

How the stock market decides to differentiate the strategy and style could greatly impact money flow and valuations. Goldman Sachs, J.B. Hunt, Charles Schwab, Citrix, Concentrix, and Interactive Brokers report earnings today.

Data to watch

Tomorrow we have Alcoa, Bank of America, Kinder Morgan, Morgan Stanley, Procter & Gamble, and United Airlines.

Thursday we have American Airlines, Baker Hughes, Netflix, and Union Pacific.

Then next week we have big names like Apple, Boeing, Caterpillar, McDonalds, Microsoft and Verizon reporting earnings.

Let’s also not forget next week we have the first Fed FOMC meeting of the new year.

With the U.S. Federal Reserve getting ever closer to implementing its first rate hikes, which most anticipate will begin in March, investors are growing less enchanted with some of the high-growth and momentum stocks that saw outsized share price gains last year.

This trend is most evident in the tech-heavy Nasdaq where nearly half of the index’s stocks have fallen by -50% from their recent peaks. The Nasdaq itself is only down by about -7% from its most recent record high. The selloff has been very much concentrated in highly-leveraged companies that have yet to deliver a profit, as the prospect of higher rates reduce future profit potential. Earnings results from these high-fliers will likely be harshly scrutinized as Wall Street tries to separate the “wheat from the chaff,” so to speak.

On the economic data front, Empire State Manufacturing and the NAHB Housing Market are today’s highlights.

For a look at all of today’s economic events, check out our economic calendar.

Stock Bulls Remain on Unstable Footing. Here Is Why

The US Consumer Price Inflation Index (CPI) rose 7% over the past year before seasonal adjustments, the steepest climb in prices since June 1982. Stripping out food and energy costs, which tend to be more volatile even in non-pandemic times, inflation rose to 5.5% between December 2020 and December 2021 — the biggest annual jump since February 1991.

Inflation issue

Interestingly, excluding gas and used cars, December inflation was 3.7%. The prices of cars and trucks surged +37% in December, furniture prices hiked +17%, and 49% of small businesses surveyed in December said they will increase the prices of goods and or services sold in 2022.

One thing that is worrisome is the fact protein prices (meat, poultry, fish, and egg prices) have surged +18% since December 2019. Food inflation along with fuel inflation could cause the US consumer to pull back so we need to be paying close attention. But even though prices went through the roof last year, they are still nowhere near the historic highs from the 1980s. Inflation peaked in the spring of 1980 at +14.8%.

Remember, however, then-Fed Chair in the early 80s, Paul Volcker, made it his mission to squash inflation. Volcker raised interest rates to +19% in 1981, prompting a recession, however, in 1982. I’m not looking for any type of crazy rates like back in the early-80’s but if the Fed has to raise rates fast and far enough to stop inflation the economy could certainly feel some negative ripple effects.

Covid influence

I know the second major Covid variant Delta extended the inflationary shock waves and this recent resurgence from Omicron is causing even more supply-side complications. I know many bulls are saying that we are again at peak inflation and we will soon start to ease back but who would have ever thought we would be two years in and still peaking with new daily reported Covid cases at over +1.5 million. If new variants of Covid continue to come in waves who know when inflation peaks…

The government injecting billions of dollars into the economy and paying Americans to stay home via stimulus checks when Covid case numbers started to push past 10,000 daily, and now that we are exceeding one million new cases per day all the talk is about the Fed removing stimulus and the need for Americans to get back to some type of normalcy. Now here we are full-circle… In the famous words of the Grateful Dead, “What a long strange trip it’s been.”

The December Producers Price Index is out today and expected to show an annual inflation rate of +9.8% after hitting +9.6% in November, the fastest pace on record. Higher prices for energy, wholesale food, and transportation and warehousing have been the biggest contributors to the pickup in producer inflation.

Bulls believe that once the current Covid wave subsides, consumers will once again dedicate a higher percentage of their spending to services. That will in turn alleviate the crushing demand being placed on manufacturers and the transportation sector, ultimately helping to bring down prices for both raw materials and labor.

That’s the theory at least. It’s worth noting that that exact pattern was starting to develop late last year as the Delta-driven wave was subsiding and consumers were starting to feel more comfortable doing things like go to restaurants, travel, and visit the gym. As we know, that was totally derailed by the rise of the Omicron variant that is currently roiling nearly every aspect of the global supply chain.

Bulls are cautiously optimistic that the Omicron wave will be short-lived with most experts predicting it will peak by the end of January. The big question is what kind of damage will it do to already overly stressed supply chains in the interim? Inflation trends may also depend on how things shake out in the labor market. If workers remain in short supply and wages continue moving higher, it will likely limit how much inflation eases.

Today, investors will be listening closely to several Federal Reserve members that are scheduled to deliver comments, including Fed Governor Lael Brainard who will testify before the Senate Banking Committee as part of her nomination for Fed Vice Chair.

On the earnings front, the key highlights will be Delta Air Lines and Sanderson Farms.

Is The “don’t fight the Fed” Approach Still Good for Traders?

Just as experienced traders and investors were on board with the Fed easing and propping up the economy, they are now not wanting to stand in the way as the Fed tries to slow things down a bit.

Wall Street insiders are hoping to get more clues as to just how “hawkish” the U.S. central bank might be leaning when Fed Chair Jerome Powell delivers testimony before the Senate Banking Committee today as part of his renomination process.

In very brief pre-prepared comments that were released yesterday, Powell pledged “to prevent higher inflation from becoming entrenched,” but didn’t mention any details in regard to interest rates or the Fed’s asset holdings.

Supply and demand issues

Powell noted that the economy was facing “persistent supply and demand imbalances” as a result of the pandemic reopening. Wall Street veterans are thinking the Fed will make three or four increases this year. Goldman is now forecasting four rate hikes with some insiders thinking five or six rate hikes might now be in the mix, i.e. perhaps a couple of half-point moves in rates might happen rather than the smaller quarter-point bumps.

A growing number also expect that the central bank will begin reducing its $8.8 trillion balance sheet as soon as this summer.

Anticipation of a more hawkish Fed saw 10-year Treasury yields climb to their highest levels of the pandemic last week, though they did ease a bit yesterday. In and of itself, the rise in bond yields is not surprising as investors have been anticipating this would happen in 2022 as the Fed begins lifting interest rates.

However, the climb has started sooner than many expected. The speed at which yields soared last week – +25 basis points – in particular, is tripping up the bulls, with some on Wall Street anticipating the benchmark 10-year could test +2% by the end of the first quarter. Bears are warning that investors may still be underestimating how far the Fed will need to lift its benchmark rate this year to keep inflation under control.

On the other hand, Bulls still expect current higher prices will find relief as supply chain dislocations and labor shortages normalize.

The road to both resolutions is proving longer and more complicated than most hoped, though, with the current Covid wave again threatening global supply chains and sidelining workers.

Transportation in China and US

A suspension of trucking services in several parts of China’s Zhejiang province has slowed the transportation of manufactured goods and commodities through the port of Ningbo, one of the world’s most important ports.

Some Chinese factories have had to stop work due to the trucking snags, too, as they can’t receive raw materials or ship out goods.

U.S. ports on both coasts are also reporting a build-up in ships waiting to unload due to dockworkers calling in sick. Cargo backups are also once again building as transportation and warehousing staff levels suffer.

The only economic data due today is the NFIB Small Business Optimism Index. It’s the Consumer Price Index tomorrow, and the Producer Price Index on Thursday that investors are really anxious to see, with worries growing that big jumps could spur even more hawkish policy moves from the Fed. On the earnings front, Albertsons is the main highlight.

Earnings Season To Push Financial Sector To New Highs?

Bulls mostly believe the sell-off that followed the Fed’s “minutes” last week was overdone and largely a knee-jerk reaction to information that investors already knew. The biggest shock seems to be the confirmation that the Fed is looking to start reducing its balance sheet as soon as this year. St. Louis Fed President James Bullard said that he favors starting to shrink the central bank’s balance sheet shortly after the first rate hike, which he said could come as soon as March.

Senate Banking Committee

Investors hope to get more details this week from Fed Chair Jerome Powell and Fed Governor Lael Brainard at their confirmation hearings before the Senate Banking Committee, where both are expected to get pressed pretty hard about how the central bank intends to counter inflation.

Powell is up first on Tuesday, January 11, followed by Brainard on Thursday, January 13. Brainard is being considered for the Vice-Chair seat. It wouldn’t be surprising to see bulls stick close to the sidelines ahead of those testimonies and possibly even a bit into the start of earnings season.

It’s worth noting that some of the biggest stock declines this week have been those viewed as “riskier” stocks like unprofitable tech companies with lofty valuations and some of the meme-driven trades.

Generally speaking, the prospect of higher interest rates very shortly means high-growth companies-aka heavily dependent on debt-are facing lower profits as the cost of maintaining that debt/growth rises. That means the Q4 earnings season could bring about a reckoning for companies that are viewed as overly leveraged, with Wall Street growing more worried about how they are going to perform in a higher rate environment. At the same time, bulls believe companies that can continue to expand along with the economy will ultimately help drive stock prices even higher in the quarters ahead.

Earnings season unofficially kicks off this Friday, January 14, with big Wall Street banks JP Morgan Chase, Citigroup, and Wells Fargo. Looking ahead to this week, key data includes Wholesale Inventories on Monday; the December Consumer Price Index on Wednesday; the Producer Price Index on Thursday; and Retail Sales, Industrial Capacity, Business Inventories, and Consumer Sentiment on Friday.

XLF to reach 43.50p and more?

XLF forecast analysis

XLF is now the leading sector of the SP500 Index. Moreover, it has all the chances to show outstanding performance in the next 4 – 8 weeks. The accumulation is quite good in this ETF. Besides, the financial sector has a strong seasonal and cyclical tendency to rally in January and February. Indeed, a lot depends on the Q4 earnings.

The banks showed excellent results in the previous three quarters. So, I expect the same now. Also, after XLF has built support near 73, it should text the next critical Gann level at 43.5 (in extension 46).

For a look at all of today’s economic events, check out our economic calendar.

What do FOMC ‘minutes’ Mean for the Stock Market?

When the Fed might begin unloading its bond holdings has fast become a red hot topic. The “minutes” released yesterday from the central bank’s December meeting indicate nearly all members favor starting the balance sheet reduction as soon as this year.

Monetary policy tightening

Investors largely view this sort of action as a form of monetary policy tightening designed to slow the economy and most believed it was still at least a year or even two away.

The Fed is currently on track to stop adding to its nearly $8.2 trillion worth of Treasuries and mortgage-backed securities by mid-March.

For what it’s worth, this is only the second time in its history that the Fed has embarked on an asset purchase “taper” program. After completing the previous (and first) “taper” in 2014, the Fed essentially maintained its balance sheet until 2018, when it began allowing some bonds to roll off. That was ended in 2019 however, when demand for bank reserves outstripped the Fed’s supply, causing volatility in short-term money markets and forcing the Fed to again add to its balance sheet.

Not surprisingly, investors are worried about the Fed once again making a misstep, especially considering that its balance sheet is twice the size it was in 2018.

It’s also worth noting that the Fed hasn’t lifted its benchmark interest rate since 2018.

Interest rates hike

Wall Street currently anticipates anywhere from two to four rate hikes this year, so this is another area where investors worry the central bank could get it wrong. The possibility that they simultaneously attempt to both raise rates and reduce asset holdings means double the chances of missing the mark.

As there is no Fed policy meeting in February, many Wall Street insiders fear that officials could move too aggressively at the upcoming January 25-26 meeting as they face increasing pressures to beat back inflation.

Nothing in recent data provides a reason the Fed might suddenly strike a more dovish tone, either. That includes the job market, which has struggled to return to pre-pandemic levels and which many bulls have hoped might sway the Fed to maintain supports for longer. However, even with nearly 4 million fewer jobs than what the U.S. had in January 2020, the Fed considers the labor market to be mostly healed.

Yesterday, ADP‘s private payroll report showed that employers added almost +900,000 workers in December, which is more than double the +400,000 gain expected from the Labor Department’s official report due on Friday. While the two data sets have diverged greatly in recent months, Friday’s report is still largely expected to exceed expectations.

Today, investors will be digesting the ISM Services Index. Most attention will be focused on the “prices paid” component, which fell slightly in November but was still the third-highest reading ever recorded. Other economic data today include International Trade and Factory Orders. Finally, earnings worth noting include Bed Bath & Beyond, Bridgestone, Conagra, Sanderson Farms, and Walgreens.