S&P 500 Traders Have A Very Busy Week Ahead

Federal Reserve Next Moves and Wall Street Expectations

Bulls are feeling a little more confident in their belief that the US Federal Reserve is moving closer to ending its tightening program after “minutes” from the November policy meeting showed “most” Fed members favored slowing the pace of interest rate hikes “soon.” According to the minutes, some officials even warned that continued rapid monetary policy tightening increased the risk of instability or dislocations in the financial system.

Most on Wall Street expect the central bank will raise its benchmark rate by 50-basis points at its upcoming December 13-14 meeting following four consecutive 75-basis point hikes.

Bears maintain that the more important issue is how high rates will ultimately need to go and how long the Fed will hold them there, which is of course dependent on how fast inflation comes down.

The most important inflation updates this week will be the PCI Prices Index on Thursday and the November Employment Situation on Friday.

Investors are also anxious to hear Fed Chair Jerome Powell discuss the US economic outlook during an appearance at the Brookings Institute on Wednesday afternoon.

Powell recently indicated that the Fed could shift to smaller rate hikes next month, but also said rates may need to go higher than policymakers thought would be needed by next year.

Data and Events to Watch

The Dallas Fed Manufacturing Survey is today’s key data.

In other news, investors are keeping an eye on China where widespread unrest over the country’s ongoing Covid restrictions has erupted in dozens of cities, including capital Beijing. Some protestors have even called for China leader Xi Jinping to step down, illustrating an extraordinary level of defiance that is extremely rare in the tightly controlled communist nation. Chinese authorities in several cities have said they will begin rolling back some Covid restrictions but that’s likely going to be a tall order with the country also battling a record number of cases.

Keep in mind, many on Wall Street have been anticipating a gradual end to China’s “zero-Covid” policy since rumors started swirling last month. Even as authorities said the claims were untrue, many still believed the Communist party would eventually relent due to the fact that nearly three years of ongoing lockdowns have crushed China’s economy.

Now, investors are worried about more extreme lockdowns in the days ahead as well as fallout from civil unrest that could compound manufacturing and shipping delays.

At the same time, some believe the growing discontent could lead China to rethink its position which would then be viewed as mostly bullish by investors.

A fully reopened China, however, would also likely put upward pressure on energy prices at a time when the world’s oil supplies are highly uncertain.

The US and its EU partners are currently still in talks regarding a “global price cap” on Russian oil. The so-called Group of 7 is aiming to finalize the details ahead of December 5, when Europe’s embargo on Russian seaborne crude takes effect. The EU is still importing close to 2.5 million barrels per day of Russian crude, meaning Europe could have a sizable supply gap to fill.

Another important date for oil traders is December 4, when OPEC+ will meet to discuss a potential output increase. Lots happening the first couple of weeks in December and many investors and money managers will be squaring up and making final adjustments ahead of the Christmas and New Year holidays.

Keep in mind, there are only 19 more trading days until the Christmas break!

SP500 Drifts Higher Amid Thin Volume

Fed Minutes

US Stock markets close at 12 noon CST on Friday, while bonds close at 1 pm CST. Low volume tends to bring higher volatility which could be on display today with the “minutes” from the Fed’s November policy meeting due out, along with some key economic data.

Bulls hope the “minutes” will show evidence of a growing divide among Fed members about the current aggressive pace of tightening. That in turn will feed hopes that the central bank may not go as far as some on Wall Street have been anticipating.

Data to Watch

Economic data today includes New Home Sales, Durable Goods Orders, flash PMIs, and Consumer Sentiment. The PMI reads are early results for November for both Manufacturing and Services with investors hoping to see more signs that wholesale prices are cooling.

Consumer Sentiment is also of interest with investors very nervous about inflation gloom keeping a lid on holiday spending. Consumer inflation expectations will also be of high interest after it bumped up in October.

The Federal Reserve believes that high inflation expectations can be a self-fulfilling prophecy so it closely tracks this component. Deere & Co. is today’s earnings highlight. I recently banked profits on my Deere position.

Next Week in Detail

Looking to next week, investors are anxious to hear Federal Reserve Chair Jerome Powell’s speech on Wednesday, November 30 where he will discuss the US economic outlook and labor market. Powell will also take questions from the host and audience members.

As for economic data, the most important will be PCE Prices on Wednesday and the November Employment Report on Friday, both of which could influence the Fed’s upcoming policy decision on December 13-14.

Other key data next week includes the FHGA Housing Price Index and Consumer Confidence on Tuesday; ADP’s Employment Change, Pending Home Sales, the second estimate for Q3 GDP, and advance reads on International Trade, Retail Inventories, and Wholesale Inventories on Wednesday; and Construction Spending and ISM Manufacturing on Thursday.

Turning to earnings, a handful of key tech results are due, including CrowdStrike and Hewlett Packard on Tuesday; and Salesforce and Snowflake on Wednesday. On Thursday, Dollar General, Kroger, and Ulta Beauty report.

S&P 500 Traders Are Waiting For Fed Speakers Today

The market has been mostly flat as investors continue to debate Federal Reserve policy and digest various international headlines.

Fed Speakers

Several Federal Reserve officials kicked off the week with comments saying more work is needed in regard to battling inflation. The Devil is obviously going to be in the details and exactly how the Fed intends to “work” on inflation in the months ahead.

Bulls really aren’t getting much traction from the idea of lower rate hikes, though, as Wall Street already widely expects the Fed will step down from 75-basis points to 50-basis points at the December 13-14 meeting.

What is more important to investors now is where the Fed’s benchmark rate ultimately ends up by the time its tightening cycle ends. It is currently set in a range between 3.75% and 4%. In September, Fed officials predicted that the rate will peak at about 4.6% next year, although Fed Chair Jerome Powell warned earlier this month that the Fed may need to go further than expected.

Most on Wall Street are penciling a Fed target rate of around +5% by mid-2023. That consensus of course could begin to sink lower if inflation and employment reads continue to trend in the right direction.

On the inflation front, energy prices and China Covid policies remain two of the bigger wild cards.

Oil Market

The oil markets have started the week on a volatile note following a Wall Street Journal report that OPEC was considering a production increase of up to +500,000 barrels per day, though Saudi Arabia later denied the claims.

Oil has already erased all the gains made since OPEC agreed to cut production by -2 million barrels per day last month as the global demand outlook has faded somewhat amid worries about a global economic downturn as well as China’s Covid policies.

At the same time, worries remain about global supplies ahead of the EU’s looming ban on Russian seaborne oil flows as well as a “price-cap” plan by the “Group of Seven” nations.

Both plans could be revealed as soon as this Wednesday, so stay tuned. China’s Covid policies are also raising fears about another round of supply chain dislocations.

Several cities in China have reinstated lockdowns or other restrictions on movement. However, supply chain experts say that a lot of US companies have already reduced their reliance on China and/or have bulked up inventories enough that any manufacturing or shipping interruptions won’t have nearly the same impact as they did earlier in the pandemic.

The ongoing damage that China’s Covid policy is having on its economy, however, is likely to continue creating headwinds for multinational companies that have been counting on the Chinese consumer market for growth.

Data to Watch

Today, the only economic data on the calendar is Richmond Fed Manufacturing. Earnings results could be a headline generator with several key companies reporting today, including Analog Devices, Best Buy, Burlington Stores, Cracker Barrel, Dollar Tree, HP, Medtronic, Nordstrom, VMWare, and Warner Music.

What Is Special About This short Trading Week?

The short week could bring with it added volatility as trading thins and many turn the holiday into a four-day weekend.

Events and Data

Most of this week’s key economic data is scheduled for Wednesday, including critical PMI flash reads and Consumer Sentiment. Wednesday also brings the release of the “minutes” from the Fed’s November policy meeting which investors will be combing for signals that divisions may be growing among Fed officials over the central bank’s aggressive tightening program.

Several Fed members have warned about the dangers of “over-tightening” in recent weeks which has raised hopes among bulls for a slowdown in rate hikes or possibly an outright pause.

Most Fed messaging implies that rate hikes will be reduced to 50-basis points starting in December, versus 75-basis points. At the same time, officials have been stressing that smaller rate hikes does not mean the Fed is close to ending its tightening campaign and that rates will likely need to stay higher for longer in order to curb inflation that is still stubbornly trending near a 40-year high.

Railroad Unions

Today, investors are anxiously awaiting the final votes from two railroad unions that could determine whether workers go on strike, potentially shutting down about 30% of the US freight network.

Three unions so far have already rejected a tentative contract agreement and the cooling off period for two of them ends December 4, meaning they could strike as soon as December 5 regardless of what the other unions vote.

BMWED, which represents the Brotherhood of Maintenance of Way Employees, agreed to extend its cooling off period to December 8 if one of the larger unions rejects the deal. However, the Brotherhood of Railroad Signalmen (BRS) is sticking to the December 4 date, at least for now.

If one union strikes, members of the other unions are unlikely to cross picket lines, meaning a full-scale rail strike could essentially begin. But railroad carriers are required by federal law to begin prepping for a strike seven days before the strike date, meaning slowdowns and stoppages could be as much as 4 days before that, when security sensitive materials like chlorine for drinking water and hazardous materials must be halted.

The railroad industry says a strike could cost the country as much as $2 billion a day. A month-long strike is estimated by the American Chemistry Council to shave -$160 billion, or one percentage point, off GDP and raise the Producer Price Index by a whopping +4%.

Keep in mind, the entire US freight system is already under stress due to low water levels on the Mississippi that have disrupted barge traffic. Congress has the option to intervene to keep railroads operating by extending the cooling off period or even imposing a contract on union members, though it’s unclear when they might be willing to act.

Bottom line, a rail strike is not going to be viewed as “good news” by investors so a “no” vote by union members today could create more headwinds for the bulls.

Earnings

There are also a few key earnings due today, including Dell, JM Smucker, SoftBank, Urban Outfitters, and Zoom.

Tomorrow the market will hear from Best Buy, Dick’s Sporting Goods, and Dollar Tree. On Wednesday we ill hear from John Deere.

As we head into the Thanksgiving holiday, just keep in mind, there are only 27 trading days left in 2022. I suspect we will see some increased tax loss selling. Meaning that some of the biggest losers in the market might feel a bit more pressure as investors and traders try to harvest the losses into yearend for tax purposes.

Bulls vs Bears: Who Wins In This Trading Range?

Bullish Bias

Bulls remain encouraged by economic data showing meaningful declines in inflation which most believe will lead to less aggressive Federal Reserve monetary policy in the months ahead.

Bulls are also pointing to signs of a resilient US consumers and still-steady spending despite relentless inflationary pressures.

Bearish Bias

Bears are pointing to recent comments by Fed officials warning that the inflation fight is far from over and that interest rates will likely need to move higher and stay there for longer than previously forecast.

While it is widely believed the Fed will scale back the size of its interest rate hikes starting at the December 13-14 meeting, bears argue that the Fed’s target rate is what matters more as that is what will ultimately influence stock valuations.

Critically, the higher interest rates climb, the higher bond rates will climb, making it increasingly tougher to justify higher stock prices.

In a speech yesterday, St. Louis Fed President James Bullard argued that the Fed’s interest rate hikes to date have had only a limited impact on inflation and that Fed rates may need to climb as high as 7% to be “sufficiently restrictive” to curb inflation.

Bears are also pointing to earnings estimates that are projecting little to no growth for at least the next couple of quarters.

Bottom line, investors are digesting a lot of conflicting signals and neither side has found a catalyst powerful enough to swing stocks in any one direction.

The debate over inflation and if it has peaked as of yet, and if the Fed will be aggressively slowing down remains the big argument and debate.

Data to Watch

There is not much on the economic calendar today with just Existing Home Sales and no real earnings of note.

Turning to next week, Thursday is Thanksgiving which means US stock, bond, and commodity markets will be closed.

On Friday, stock markets close early at 12 noon CST while most futures markets also have abbreviated hours.

Most of next week’s economic data is all crammed into Wednesday, including the “minutes” from the Fed’s November meeting. Also on the calendar for Wednesday is New Home Sales, Durable Goods Orders, flash PMI, and Consumer Sentiment.

There are some key earnings due out next week as well, including Dell, JM Smucker, SoftBank, Urban Outfitters, and Zoom on Monday; Analog Devices, Best Buy, Burlington Stores, Cracker Barrel, Dollar Tree, HP, Medtronic, Nordstrom, VMWare, and Warner Music on Tuesday; and Deere & Co. on Wednesday.

US Stock Markets Analysis: Top 3 Things To Know Today

Federal Reserve

Federal Reserve officials are acknowledging last week’s lower-than-expected Consumer Price Index, calling the October read “encouraging.” Fed Vice Chair Lael Brainard went so far as to say it would “soon” be appropriate for the Fed to “move to a slower pace of rate increases,” which allow what the Fed has done already to work its way through the system. However, Brainard and other officials also continue to stress that the Fed has additional work to do and warn that rates will likely move higher and stay there longer than currently projected.

Many stock bears are pointing out that no matter what the Fed does, corporate earnings in the quarters ahead are likely going to suffer as borrowing costs remain at elevated levels, high inflation continues to erode margins, and the ongoing pullback in consumer spending dents sales growth.

2023 Forecasts

Bears further note that consumer confidence is growing more fragile with the housing market in decline and inflation stubbornly holding on. Couple that with more interest rate hikes to come and the squeeze on spending power from high energy prices expected this winter, bears believe that the prospects for consumer spending over the holidays and the first part of 2023 are deteriorating fast.

Many Wall Street insiders are also a bit nervous about weaker forecasts for 2023 that will continue rolling out in the days and weeks ahead.

Morgan Stanley yesterday issued a warning that earnings expectations remain too high and forecast the S&P 500 will be down near 3,000-3,300 by the end of Q1 2023 amid a much deeper “earnings recession.” Analysts at Goldman Sachs said in a recent research note that they lowered their 2023 earnings growth forecast for S&P 500 companies to 0%, from a previously expected increase of +3%, noting that “weak” third-quarter margins presage “a headwind” next year.

Nearby, investors are highly anxious to see Q3 results from Advanced Auto Parts, Home Depot, Lowe’s, Walmart, Target, Macy’s, Kohl’s, Foot Locker, and Ross Stores this week which brings in a wave of retailer earnings. Remember, Target and Walmart are considered “bellwethers” for the retail sector as well as the wider economy so investors will be paying very close attention to their details.

I suspect Home Deport and Lowe’s will also be highly scrutinized. There’s also some important tech earnings out later this week that will include Cisco, Nvidia, Palo Alto Networks, etc.

Data to Watch

In economic data, Empire State Manufacturing and the Producer Price Index are both out today. As for the war in Ukraine, President Volodymyr Zelenskyy triumphantly walked the streets of the newly liberated city of Kherson last night, hailing Russia’s withdrawal as the “beginning of the end of the war,” but also acknowledging the heavy price Ukrainian troops are paying in their grinding effort to battle back.

As for China, we continue to see data that confirms more of an economic slowdown.

Three indicators on China’s economy in October missed expectations and marked a slowdown from September, according to data released overnight by China’s National Bureau of Statistics.

At the same time, there’s talk that Covid is really spiking in Beijing and the southern city of Guangzhou. There’s talk that virus testing requirements to enter some public venues in the capital city have again tightened in the last few days.

Are Stock Bulls Still In Control?

The S&P 500 gained nearly +6% last week while the Nasdaq was up over +8% and the Dow climbed just over +4%.

Bullish Bias

Indexes are still sitting on some sizable losses, although bulls are feeling more optimistic about a year-end rally thanks to inflation showing a meaningful pullback, which is in turn boosting hopes for a less aggressive Fed.

Bulls are also saying the weaker US dollar is a nearby tailwind for stocks, which might be the case. Bears, however, think the sizable pullback in the dollar might be a “canary in the coal mine” or some type of signal that perhaps things are going to get much worse than anticipated for the US economy.

China

Investors are also cautiously optimistic that China is beginning to move away from its “Zero Covid” policy. Officials on Friday shortened quarantine times for both travelers and those that have been in close contact with Covid patients. They’ve also relaxed some risk guidelines, such as what qualifies as “high-risk,” and seem to have narrowed parameters for lockdowns and quarantines.

However, officials also insist that they are not moving away from strict controls designed to contain outbreaks, pointing to China’s massive population as well as a lack of medical resources versus developed countries in the West.

It’s not clear how the loosened controls are going to impact China’s economy or manufacturing sector but we will likely find out soon. I have to imagine if the Chinese economy is actually going to reopen and bounce back, oil prices will more than likely start heading even higher, meaning US energy stocks could still have more room to run.

I’m being a bit cautious on the Chinese optimism as Covid case counts in several major Chinese cities are again on the rise. Beijing, Guangzhou, and Zhengzhou are currently seeing record Covid numbers, and some government officials inside China are talking about possible extreme restrictions on movement and perhaps more factory lockdowns.

Data to Watch

Investors will also be paying close attention to reports out of the G20 meeting today where US President Joe Biden and China President Xi Jinping are expected to hold talks on the sidelines. Wall Street is hoping for signs of lessening tensions between the two countries on both the business and geopolitical fronts. Any indications that the US might consider easing China sanctions or signs of greater cooperation regarding semiconductors or other technologies the US deems “sensitive” could be bullish for stocks.

Investors would also like to see signs that China is willing to put more pressure on Russia to end its war in Ukraine.

Any discussions regarding Taiwan will also be of high interest to investors though insiders doubt the highly sensitive subject will be brought up.

Here in the US, investors are bracing for retailer earnings due out over the next couple of weeks and that most expect will include some very disappointing results. Investors are particularly concerned about inventory overhangs that started showing up in Q2 earnings results and have even heavily influenced US GDP (gross domestic product) for two straight quarters now.

Companies that are still struggling to solve excess inventory problems are likely going to be punished by investors that are running out of patience. Investors are also anxious to hear forward guidance and any insights into consumer spending trends. Advanced Auto Parts, Home Depot, and Walmart kick off the retail releases on Tuesday. Today’s earnings highlights are SoftBank and Tyson Foods. There is no economic data today.

What You Need To Know About Economy To Start Your Trading Week?

The Consumer Price Index on Thursday is viewed as another critical test for the future path of the Fed’s tightening program.

Economy in Detail

Economists expect the year-over-year headline inflation rate to pull back to around +8% from +8.2% previously with the “core” rate remaining flat at +6.6%. It’s worth noting that this is the first month in several that consensus is not expecting an increase in the annual “core” rate. Signs of a cooling economy remain elusive even after the Federal Reserve has lifted its benchmark interest rate by the most aggressive pace in over four decades.

The October Employment Report on Friday was kind of a mixed bag, showing both a better than expected gain in jobs but a slight increase in the unemployment rate.

Traders are now nearly evenly divided on what the Fed’s December meeting will bring with about 52% betting on a 50-basis point hike and 48% expecting a fifth consecutive increase of 75-basis points.

A bigger-than-expected decrease in CPI will likely shift more consensus toward the 50-basis point view and provide a needed boost for the bulls that have continually had hopes dashed for a less aggressive Fed.

Many economists note that Q3 earnings results show widespread evidence of a slowing US economy that has hit companies across nearly every sector, energy being one of the few bullish exceptions. While there are still only glimmers of weakness showing up in the economic data so far, insiders argue it is just a matter of time before the data catches up and more significant signs of a pullback are revealed.

Bulls believe an economic pullback could force the Fed to ease or possibly abandon some of its planned monetary tightening. Bears don’t argue that a slowdown is imminent but are quick to warn that if we get a significant pullback in growth but inflation remains stubbornly high (aka stagflation), it will be an economic wrecking ball that spares few companies in the stocks market.

Bears further argue that slower growth and higher unemployment does not guarantee a more accommodative Fed as the central bank has made clear that bringing down inflation is a priority above all others, including the US job market.

Data to Watch

Another danger for US stocks that Wall Street is still nervous about is the strength of the US dollar which is greatly being reinforced by the Fed’s interest rate increases. The USD has weakened some over the past two weeks but currency traders warn it could again shoot higher if the CPI comes in hotter than expected.

A hotter CPI reading could also send bond rates soaring higher and add to stock market headwinds.

Aside from the CPI, there is not much on the US economic data calendar this week. Consumer Credit is due today, followed by the NFIB Small Business Optimism Index on Tuesday, and Consumer Credit on Friday.

It is an important week for China data though, with trade data due out overnight tonight and inflation numbers set for release overnight on Wednesday. China will also release loan data sometime this week.

Keep in mind, over +80% of the S&P 500 companies have already reported earnings.

A few of the bigger companies reporting today include Activision Blizzard, BioNTech, Diamondback Energy, Palantir, and Ryanair.

Meta (Facebook) is supposedly going to announce large layoffs this week and Apple reported over the weekend that the Chinese Covid related lockdowns are creating some bigger headwinds for iPhone production.

Investors Await the Critical October Employment Report

Economy

Wall Street expects the jobs report to show a gain somewhere between +200,00 to +230,00, versus +263,000 in September with the unemployment rate expected to tick up to 3.6% from 3.5% previously.

Maybe more importantly, wage gains are expected to fall back to a year-over-year rate of +4.7% from +5% last month. A report that is roughly in-line with expectations may not do much to rally the bulls, many of which have moved to the sidelines after the Federal Reserve on Wednesday deflated hopes that the central bank was nearing the end of its tightening cycle.

The bulls are now struggling to recalibrate, with not much in the way of positive news to help the effort. The 2-year treasury yield is +4.7% and still climbing.

Keep in mind, the 2-year was at less than 0.5% a year ago. At the same time, we are now starting to hear of some big important companies laying people off and freezing on new hires.

Earnings

Apple has paused hiring for most major jobs, Coca-Cola is offering voluntary buyouts, e-commerce platform Stripe and ride-hailing service Lyft are the latest technology companies to lay off staff on Thursday, while Amazon said it would pause new hires in its corporate workforce, and Twitter is now set to lay off up to half of its staff today under new owner Elon Musk. Adding to the wall of worry has been little to no signs that inflation is retreating and a disappointing Q3 earnings season that has highlighted the ongoing headwinds that continue to erode corporate profits.

Bottom line, the concerns and uncertainties keep piling up and it’s becoming a much steeper hill for bulls to climb.

Midterm Elections

Turning to next week, the midterm elections on Tuesday could bring some added volatility to stock markets.

Historically, stocks tend to gain after midterms regardless of which party ends up controlling Washington, so perhaps the market will get a little bear bounce.

Importantly, Federal Reserve policy is not impacted by changes to party control in the House or Senate so that is not a factor.

If Republicans end up with control of both houses, some think oil and gas companies could be a beneficiary. The most recent odds makers currently give the Republicans a very strong chance of sweeping both the House and the Senate. It sounds like control of Washington may come down to the races in Arizona, Georgia, and Pennsylvania.

Data to Watch

The other major highlight next week is the October Consumer Price Index (CPI) due out on Thursday.

There is not much data on the calendar next week otherwise with just Consumer Credit on Monday and Consumer Sentiment on Friday.

On the earnings front, results are due from Activision Blizzard, BioNTech, Diamondback Energy, Palantir, and Ryanair on Monday; Bayer, CNH Industrial, Disney, Global Foundries, Lucid, and Occidental Petroleum on Tuesday; Adidas, D.R. Horton, Rivian, and Roblox on Wednesday; and AstraZeneca, NIO, and Siemens on Thursday.

Fed’s “Hawkish” Message In Detail

Fed Message

As expected, the central bank lifted its benchmark rate by 75-basis points for the fourth time in a row now, bringing the Fed funds target range up to +3.75-4.00%.

Bulls are now pointing to an addition in the latest policy statement stating that the Fed “will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

Bulls take that to mean that Fed officials want to slow down the tightening program in order to give the work they’ve already done time to filter through the economy. This hints at a plan mentioned by officials previously to “step down” the pace of rate hikes. Meaning rate increases might get progressively smaller and less frequent, though not stop.

Bears, however, see less room for optimism after Powell said the Fed still “had a long ways to go” and indicated that the rates may ultimately need to move higher than forecast in September because the inflation picture has gotten “more and more challenging.” The “dot plot” forecasts from that meeting saw the policy rate ending 2023 in the +4.50-4.75% range.

Bears and bulls both seem to agree that the chances for a so-called “soft landing” have gotten very slim with anticipation of recession in 2023 now widespread. The difference is in how deep the two sides think a downturn will cut.

Other Factors

Wall Street insiders believe the bigger risk for stocks is still posed by an “earnings recession” as the post-pandemic bust continues to deflate lofty valuations. Bears are warning the pain will likely get worse for businesses that have been counting on China for future growth as the country digs in on its “zero Covid” policies that have crushed its economy.

Keep in mind, China’s lockdowns have also hit earnings of American companies, many of which are again currently being impacted under new lockdowns that began this week.

That includes Apple’s largest iPhone manufacturing plant, located in Zhengzhou. Q3 earnings growth for the S&P 500 was on track for a gain of just over +2% at the start of the week. However, stripping out the energy sector, S&P 500 companies are reporting a decline of -5.5%.

On the earnings front today, results are due from Amgen, Cigna, ConocoPhillips, Corteva, Moderna, Monster Beverage, Nintendo, PayPal, Starbucks, and Zoetis.

Economic data includes the ISM Services Index, International Trade, Productivity and Costs, and Factory Orders.

Will Fed Matter This Time?

It’s worth noting that despite the massive volatility witnessed throughout October, all three indexes closed out the month with double-digit gains.

Bulls vs Bears

For the Dow, a gain of +14% in October was its best performance since 1976. Bulls are hoping any signs that the central bank will slow down rate hikes in December and beyond will fuel another surge in stock prices and perhaps even help indexes turn positive by the end of the year.

Bears argue that more accommodative monetary policy from the Fed is not enough to push stocks into positive territory as companies still face a multitude of problems, including a slowing economy on top of elevated operating costs that may be much slower to come down than Wall Street is hoping.

Expectations that the Fed will need to maintain tighter monetary policy for longer is continuing to roil bond markets as well with yield’s on the 2-year Treasury note firmly above that of the 10-year.

Yields

When shorter-term yields are higher than longer-term yields, aka a “yield curve inversion,” some believe it is a signal of a future recession. Others argue that typically reliable bond market signals are skewed right now because of the Fed’s rapid pace of interest rate hikes.

There are concerns that the fallout in bonds risks creating a liquidity crisis in the $24 trillion US Treasury market, with volatility making it more expensive for the primary dealers to operate.

Remember, as bond yields rise, bond prices drop. Demand for US government debt already in circulation has fallen off a cliff due to the far lower interest rates it was issued at, and some worry this could grow to a glut of unwanted debt that further forces down the price of bonds.

That in turn is raising expectations for some sort of intervention from the US Treasury, likely in the form of buybacks as a way to inject liquidity and stabilize the market.

Bond investors are hoping the Treasury department will outline a plan this week, though the beginning of actual buybacks isn’t expected to be immediate. If the Treasury fails to address the issue, some insiders worry that bond market volatility could spike further and again put stocks under pressure.

Data to Watch

Today, investors will be digesting ISM Manufacturing, Construction Spending, and the Job Openings and Labor Turnover Survey (JOLTS). The JOLTS report in particular will be closely watched after job openings fell by over -1 million in August. Wall Street insiders are expecting a less steep decline in September with consensus looking for a number around 9.875 million, versus 10.05 million previously.

On the earnings front, highlights today include Advanced Micro Devices, Airbnb, BP, Eli Lilly, Pfizer, Phillips 66, and Uber.

Investors Are On Edge Ahead of the US Federal Reserve’s Two-day Meeting

Fed in Details

Most on Wall Street expect the Fed will lift rates by 75-basis points this week but the bigger question is what happens at the December meeting and beyond.

Bulls are hoping the Fed will signal lower rate hikes starting in December. Bears continue to argue that inflation data has not provided any justification for a less aggressive Fed.

The latest PCE Prices Index was unchanged in September at an annualized rate of +6.2%. The report, released on Friday, also showed that the so-called “core rate”, which strips out food and energy, actually climbed higher to +5.1% versus +4.9% in August, another sign that inflationary pressures are still being felt across nearly every corner of the economy.

Inflation has of course been bolstered by oil, fuel, and other commodity price shocks, pandemic-related residuals (China lockdowns, etc.), and global supply chain issues that have been exacerbated by Russia’s invasion of Ukraine.

These issues have made the inflation fight even tougher for the US Fed and other central banks that have hoped to rein in prices before they become embedded.

Labor Market

The most direct route for inflation to become embedded is via wages, which in the US have been rising at an annual rate of more than +5% for the past year. However, that is substantially below the rate of inflation, providing strong motivation for employees to continue seeking higher wages and a key reason why some are worried about a potential “wage spiral.” That’s also why the Federal Reserve is so keen to cool the job market a bit.

There have been a lot of announcements of hiring slowdowns and even outright job cuts by big companies but US employment data has not reflected anything resembling a pullback in the labor market. It’s worth noting that while big businesses may be looking to cut payrolls, nearly half of small businesses still say they are struggling to hire enough workers, and nearly a quarter are still planning to create new jobs in the last quarter of 2022.

Keep in mind, “small businesses” of 500 employees or fewer make up 99.9% of all US businesses and account for nearly half the US workforce.

It’s also worth keeping in mind that the services sector accounts for more than three-quarters of the US job market. If anything, service sector hiring is expected to accelerate in the last quarter of the year as retail, restaurant, and travel businesses add seasonal employees.

The US Labor Department does try to smooth out these seasonal trends in its official data but the bump in seasonal hiring nonetheless tends to help buoy the numbers in the last few months of the year. Meaning the pullback in the labor market that many are expecting, I argue may not be in the near-term cards.

The October Employment Report on Friday is expected to show job gains around +250,000 following a higher-than-expected increase of +263,000 in September. Importantly, Wall Street is looking for a decline in average hourly earnings to +4.7% from +5%.

Data to Watch

The economic data highlight today is the Dallas Fed Manufacturing Survey.

On the earnings front, bulls are hoping for strong earnings from energy sector companies this week will help lift some of the gloom left by mostly disappointing tech earnings last week. Exxon and Chevron, the two biggest US oil companies, both got things off to a solid start on Friday. Exxon’s profit of nearly $20 billion was a new record for any quarter, and +10% higher than the previous record set in Q2. Chevron’s Q3 profit of $11.2 billion was just slightly weaker than last quarter’s record.

Results from key energy companies this week include BP and Phillips 66 on Tuesday; ConocoPhillips on Thursday; and Dominion Energy and Duke Energy on Friday.

Today’s earnings highlights are Aflac, NXP Semiconductors, and Stryker.

There’s a chance the Fed might sound a bit less hawkish or at least leave a small window open for the bulls in its commentary this week. At the same time, next week, we have the mid-term elections finally moving behind us which might also offer the market a bit less uncertainty.

New Lockdowns in China Creating Worry: The Chinese economy is already struggling because of the nation’s “Zero-Covid”, now there are even more shutdowns in the major gambling city of Macau and in Zhengzhou, the home of Apple‘s largest iPhone assembly plants. Keep in mind, Foxconn, which acts as a supplier to US-based Apple, has hundreds of thousands of workers at its Zhengzhou complex.

Also, new lockdowns have surfaced in Wuhan, where the Covid virus is suspected of originating. Also, Guangzhou’s schools and restaurants have been suspended, while Beijing and Shanghai have seen certain districts targeted for lockdowns. Japanese bank Nomura puts the number of Chinese under restrictions at around 232 million, up from 225 million last week. Some 31 cities there are under some form of lockdown as of Oct. 27, restricting one in six people in China and covering 24.5% of its gross domestic product, the Nomura analysis found.

Key Oil Company And PCE Prices Index To Set a Tone Today

Earnings Season

Wall Street is again digesting somewhat disappointing big tech earnings, this time from Amazon and Apple. While Amazon’s Q3 earnings and sales were in line with Wall Street expectations, the company disappointed with less-than-expected growth in its Amazon Web Services cloud business.

Maybe more importantly, Amazon’s projected sales growth for Q4 came in far below analyst expectations. Apple’s Q3 earnings and revenue results topped analyst estimates but Wall Street is worried about slower growth in its business services category as well as iPhone sales, both of which missed estimates.

It’s worth noting that Apple CEO Time Cook said supply issues had no significant impact on the company’s Q3 results, a turnaround from recent quarters and a welcome sign that supply chain headwinds are mostly in the rearview.

Analysts that are bearish on the tech sector believe growth will continue to deteriorate, however, because a lot of demand for big tech products and services was pulled forward by the pandemic. Meaning the loss of pandemic-fueled demand and stimulus dollars will now leave a “demand vacuum” that could weigh on the sector in the quarters ahead.

Today, big oil giants Exxon and Chevron are expected to post outstanding Q3 results, though weaker than Q2 due to the retreat in oil prices. Still, both companies are expected to deliver their second-highest profits ever, behind only Q2 2022.

There is some concern on Wall Street that big profits might attract unwelcome attention, however. The UK has slapped windfall taxes on energy companies and the EU is working on a similar plan, which has raised fears the US might follow suit.

AbbVie, Colgate Palmolive, Mobil, and NextEra Energy also report results today. On the data front, investors have all eyes on the PCE Prices Index due out this morning and expected to show year-over-year gains for both headline and “core” inflation (strips out food and energy).

Data to Watch

Wall Street is looking for a headline PCE Prices read of +6.3%, and a “core” rate of +5.2%. If the numbers come in lower than expected, that will obviously boost the bulls’ belief that the Federal Reserve is preparing to ease up on its rate hikes.

At its two-day meeting next week on November 1-2, the Fed is widely expected to lift its benchmark rate by +75-basis points. The big debate is what the Fed will do in December and bulls have high hopes that officials will signal a less aggressive hike of perhaps 50-basis points.

The European Central Bank delivered its second straight 75 basis point interest rate hike yesterday. However, many are interpreting ECB President Christine Lagarde’s follow-up comments as “dovish” because she put a lot of stress on the importance of upcoming data which many expect will show the EU economy is in or near recession.

Next week, the economic data highlight will be the October Employment Situation on Friday.

Inflation reads from ISM Manufacturing on Tuesday and ISM Non-Manufacturing on Thursday will also be in the spotlight. Q3 earnings continue next week with a wide range of sectors represented. Key results include Aflac, NXP Semiconductors, and Stryker on Monday; Advanced Micro Devices, Airbnb, BP, Eli Lilly, Pfizer, Phillips 66, and Uber on Tuesday; Allstate, CVS, Humana, Novo Nordisk, Nutrien, Qualcomm, Trane, and Yum Brands on Wednesday; Amgen, Cigna, ConocoPhillips, Corteva, Moderna, Monster Beverage, Nintendo, PayPal, Starbucks, and Zoetis on Thursday; and Berkshire Hathaway, Dominion Energy, Duke Energy, and Hershey on Friday.

Investors Are Digesting Disappointing Earnings From Tech Giants

Earnings in Details

Google reported slowest revenue growth since 2013 and its fifth consecutive quarter of declining sales growth, including the first drop in ad revenue for its YouTube platform.

Similarly, Microsoft sales growth also slowed due to eroding personal computer sales while income fell to the lowest level in more than two years. Facebook parent Meta Platforms is the big tech highlight today and expected to report a second consecutive quarter of slowing ad revenue.

Meta’s struggles have been well broadcast, so bulls are hoping that unimpressive earnings won’t add to the bearish sentiment that’s threatening the entire tech sector right now.

Other earnings due today include ADP, Boeing, Bristol Myers Squibb, Canadian Pacific, CME Group, Edwards Lifesciences, Ford, Norfolk Southern, Suncor Energy, and Thermo Fisher Scientific.

Overall, bulls still expect decent Q3 results will help keep stock prices buoyed but are looking ahead to a bigger boost from a shift in Fed policy.

There is again a growing belief among many bulls that interest rate hikes will get smaller starting as soon as the central bank’s December meeting.

Economic Data

Bears, however, argue that inflation still remains too high for the Fed to consider easing up on its tightening program and any extended rallies will be short-lived as long as investors believe the Fed is going to keep lifting rates.

In particular, bears are pointing to bond yields that continue to surge, providing an increasingly attractive alternative to stocks.

Investors will be combing the details of updated monetary from the Bank of Canada today and the European Central bank on Thursday for clues as to where the US Fed might be headed next.

US data today will provide some more insights into how the overall economy is doing with advance reads on International Trade, and Retail and Wholesale Inventories today.

New Home Sales for September are also due today with analysts expecting a sizable drop to an annualized rate of around 585,000, versus 685,000 new home sales in August.

It’s worth noting that the S&P Corelogic Case-Shiller Home Price Index for August showed a +13% year-over-year gain, down from +15.6% the previous month.

In a statement, S&P managing director Craig Lazzara said the decline “clearly” shows the growth of home prices peaked this spring and that the “forceful deceleration may well continue.” I continue to believe we are in the midst of yet another bear market rally that may continue for the next couple for weeks. I am staying overweight “cash” and am not interested in chasing the market higher.

Earnings Season Continues – “Big 5” Report Over the Next 72 hours

Stock investors await big tech earnings. The so-called “Big 5” tech companies – Alphabet (Google), Amazon, Apple, Meta (Facebook), and Microsoft – which account for nearly 25% of the S&P 500‘s total market value, all report over the next 72 hours.

Big 5” in Details

Alphabet and Microsoft kick things off after markets close today, followed by Meta on Wednesday, and Apple and Amazon on Thursday. The results are viewed not only as a gauge of the wider technology industry’s health, but also the overall economy as these companies touch nearly every corner of American business and consumer life.

Growth for the “Big 5” is expected to have slowed to just under +10%, compared to +55% profit growth in full-year 2021 when revenue for these behemoths topped a record $1.4 trillion.

With the stocks of these 5 companies down by double-digits for the year already, many bulls think there is potential for a strong rally if they can deliver better-than-expected results.

Importantly, investors are looking for signals that lingering pandemic supply chain snags are mostly in the rear view, which would be positive for both corporate margins as well as the Fed’s inflation fight. The really big concern, however, is how they are handling their outsized US dollar exposure. This could be a tough headwind as these multinationals face serious exposure to the strength in the US dollar.

Data to Watch

Earnings are also due today from 3M, ADM, Biogen, Chipotle, Coca-Cola, General Electric, General Motors, Raytheon, UPS, Valero, and Visa.

On the economic data front, home prices take center stage with the FHFA House Price Index and the Case-Shiller National Home Price Index, both for September.

For what it’s worth, the S&P CoreLogic Case-Shiller Index for August registered the first month-over-month decline since January 2019. While prices in the 20-city index fell by -0.8%, year-over-year home prices are still up more than +14%.

Investors may also be monitoring the Ukraine situation a bit more closely in the days ahead. Russia has been warning that Ukraine is going to deploy a so-called “dirty bomb” – a bomb that combines radioactive material with conventional explosives – in its own territory. Ukraine as well as Western officials have rejected the accusation, but some are worried that Russia is making the claim as a pretext for escalating the war.

Other military officials think it is just a scare tactic, with Russia hoping that the West’s support of Ukraine will weaken under the threat of global nuclear war.

Something else worth keeping an eye on is the 10-year Treasury yield posting a new multi-year high yesterday at 4.25%… money continues to circulate and certainly has some alternatives it hasn’t had in many years.

Will Q3 Earnings Help Stock Bulls?

Q3 Earnings

Earnings for Q3 so far have been better than many on Wall Street might have anticipated. Bears are quick to point out that only about 7% of S&P 500 companies have reported and that the earnings “beats” delivered so far are against expectations that are considerably lower than where they started.

Bears also note that most of Q3 earnings growth is expected to come from the Energy sector with earnings growth pegged at nearly +120%. Excluding the Energy sector, Q3 earnings for the S&P 500 index are expected to be down -5.7% from last year with 7 of the 11 S&P 500 sectors expected to show negative year-over-year earnings growth.

Oil giants Exxon and Chevron both report on Friday.

At the other end of the spectrum is the Technology sector where earnings are expected to be down more than -14% in Q3 2022 and down more than -9% in Q4.

The world’s largest tech firms all report results this week with Alphabet and Microsoft announcing on Tuesday, Meta on Wednesday, and Apple and Amazon on Thursday.

Year-to-date, Alphabet’s stock is down over -25%, Microsoft is down nearly -30%, Meta is down almost -40%, Apple is down almost -19%, and Amazon is down over -30%.

Analysts seem to think advertising dependent businesses are going to take the biggest hits while cloud computing is expected to witness ongoing growth, though at a slower pace.

Investors will also be keen to hear how US government crackdowns on China might impact various tech companies. The earnings highlights today will be Discover Financial Services and HSBC.

Data to Watch

Turning to economic data, this week’s main attraction is PCE Prices on Friday with Wall Street expecting both headline and “core” inflation to move higher.

Investors today will be digesting preliminary reads on IHS Markit’s Manufacturing and Services PMIs. Recession fears have been fanned in recent months by declining manufacturing activity with the index falling from around 58 in February to just over 50 in September.

A PMI reading below 50 indicates contraction, a level the index hasn’t breached since May of 2020 during the height of pandemic lockdowns.

Wall Street will also be closely watching central bank decisions this week which could provide a preview of what to expect from the US Federal Reserve in the months ahead.

Bank of Canada announces updated monetary policy on Wednesday, followed by the European Central Bank (ECB) on Thursday, and Bank of Japan on Friday. In particular, if Bank of Canada and/or the ECB deliver smaller rate hikes or signal a more “dovish” stance, Wall Street will start to expect a similar pivot by the US Federal Reserve.

The Fed’s policy meeting is next week, November 1-2.

The trade has the odds at about 95% that the Fed raises by another +75 basis-points. The bigger debate right now is the December 14th FOMC meeting and if the Fed goes another +75 basis-points or are they going to start dialing it back to perhaps +50 basis points.

Bulls believe any sign of the Fed dialing it back might signal the bottom and one step closer to the Fed easing further in the weeks and months ahead.

Don’t forget, we are now entering the blackout period for Fed members speaking, so they won’t be able to talk down the market and or spread hawkish rhetoric.

Also keep in mind, lots of big names report earnings this week.

If they can surprise with better-than-expected and profit margins not getting too beaten up the recent bear market rally could continue.

Tomorrow’s big names include Google, Microsoft, Chipotle, General Electric, General Motors, Coca-Cola, UPS, Raytheon, Halliburton and Biogen to name a few. Wednesday will include names like Facebook, Ford, and Boeing.

Thursday we have Apple, Amazon, Caterpillar, Intel and Mastercard. Friday is all about oil and energy with big names like Chevron and Exxon Mobil reporting.

Thoughts on Possible Upcoming Rail Strike – We continue to hear talk of a possible railroad strike come in mid to late-November. From what the Wall Street Journal recently reported, “Six of the 12 railroad unions that represent 115,000 workers nationwide have approved their tentative agreements with the railroads so far, but all of them have to ratify their contracts to avoid a strike.

And after the midterm elections, unions may be more willing to strike and the current administration in Washington may be more willing to let it play out since they are strong supporters of unions.” Lots of moving parts and lots to think about.

The Stock Market Upward Momentum Is Not Sustainable Yet

Netflix reported much better than expected numbers after markets closed yesterday.

The streaming giant notably ended its declining subscriber streak, adding more than double the new users that Wall Street was looking for.

Tesla

Tesla is the big earnings highlight today (reporting after the close) and there are worries that disappointing results could again dampen investors’ mood. The company already reported weaker-than-expected deliveries for the quarter so Wall Street doesn’t have overly optimistic expectations, so perhaps the surprise will be to the upside. Investors do however want to see some improvements on the supply chain front that have been a main cause of production delays, as well as forward guidance that shows Tesla will be able to make up those lost sales.

Many bulls hope that overall improved forward guidance from big companies during Q3 earnings will help calm investors’ nerves and lure more money back into the market. That may be a tough sell ahead of the key reports due next week, which will include some of America’s and the world’s biggest companies.

Apple, which according to a report yesterday has cut production for some of its new high-end iPhones due to weak demand. Big tech and other companies that do business overseas also face major currency headwinds due to the unrelenting strength of the US dollar. Some insiders are worried that this could end up putting a bigger dent in corporate profits than many on Wall Street are currently anticipating.

Data to Watch

Aside from Tesla, other earnings due out today include Abbott Laboratories, Alcoa, ASML Holdings, Baker Hughes, IBM, Kinder Morgan, Lam Research, Las Vegas Sands, Nasdaq, NextEra Energy, PPG, Procter & Gamble, Prologis, and The Travelers Companies. On the economic data front, Housing Starts and the Fed’s Beige Book are the key releases.

Big names tomorrow include AT&T, Blackstone, CSX, Dow, Danaher, Tractor Supply, Union Pacific, Phillip Morris, SNAP. I’m still look for more of a bear market rally that may last a bit but ultimately followed by another leg lower.

Q3 Results Bring Hope to Wall Street

Bulls believe Q3 results that have mostly topped analyst estimates are an encouraging sign that companies and consumers alike are holding up well under the current inflationary headwinds.

Bulls’ Case

Bulls are also pointing to executive comments on earnings calls that are painting a rosier picture of the economy than financial headlines may indicate. Bank of America yesterday was the latest big bank to say they see no immediate signs that US consumers are under significant financial stress. BofA noted that even its less affluent customers had savings rates still five times higher than pre-pandemic levels while loan delinquencies are at their second-lowest level of all time.

To be clear, many bank executives are still predicting the economy will slip into recession by next year but have also said strong consumer and business balance sheets should help limit any damage.

There seem to be few on Wall Street that believe the US can escape inflation without at least a moderate downturn. The big worry is that recession sets in and inflation still remains high into 2023 in spite of the Fed’s tightening program. Many inflation hawks argue that interest rates have to move above the rate of inflation in order to cool things off, which would mean a Fed fund’s rate of near 9% at current levels.

Investors will start to glean insights into a wider mix of businesses this week with nearly every sector represented. Some are worried that disappointing results from Netflix today could cast another dark cloud over the tech sector. Investors are expecting the streaming giant to add 1 million new subscribers after reporting two consecutive quarters of declining users.

Data to Watch

Albertsons, Hasbro, Interactive Brokers, JB Hunt, Johnson & Johnson, Lockheed Martin, and United Airlines also report today.

The only US data today is the NAHB Housing Market Index. It’s worth noting that China has “indefinitely” delayed the release of key economic data, including GDP, retail sales, property sales, and home prices that had previously been scheduled for release today and tomorrow. China also delayed trade data last week without any explanation.

The delays come as China is in the middle of its twice-a-decade Communist Party Congress where President Xi Jinping is expected to be given a historic third term in office. There is a lot of speculation about the data delay, including a technical glitch, worse-than-expected data, or even that Chinese leaders want to keep the focus on the party’s key messages during the Congress.

Chinese leaders have maintained an official GDP target for this year of around 5.5%, though growth during the first half was less than half that. From my perspective, bears could backpedal the next couple of weeks as there are very few macro economic headlines in the mix.

Most of the nearby talk could circulate around slightly better-than-expected US corporate earnings, more talk and chatter of some type of Treasury bond buyback program, talk of a cap being placed on EU natural gas prices, China releasing more optimistic headlines following this week’s Congressional conference, the UK taking a more dovish approach, and the US dollar perhaps weakening a bit.

Earnings Season to Set a Tone for the Week

Bank of America today and Goldman Sachs on Tuesday (10/18) will cap off big Wall Street bank earnings this week following results from Citigroup, JPMorgan Chase, Morgan Stanley, and Wells Fargo last Friday.

Q3 earnings

Those numbers overall showed lower profits versus last year mostly due to a decline in IPO and corporate merger activity, though that was somewhat offset by sizable increases in interest income. Notably, banks also added more cash to reserves to guard against bad loans and other possible hits if the US economy falters further. Most banks said US consumers are generally holding up in the face of inflation and that bank customer health indicators still show few signs of stress.

Insiders now expect Q3 profits for S&P 500 companies to rise +3.6% from a year ago, down from an +11.1% increase expected at the start of July. Only about 7% of S&P 500 have reported so far with the majority of results filtering out over the next two weeks.

The bulk of big US tech companies report next week (10/24 – 10/28), which many Wall Street insiders think could limit upside potential this week.

Keep in mind, Alphabet. Apple, Amazon, Microsoft, and Tesla account for 21% of the S&P 500’s value so any big moves in those stocks can have an outsized influence on the overall market. This week’s earnings results will come from a broad cross-section of industries that should provide more clues as to where troubles may be lurking.

The energy sector by far is expected to report the biggest annual gains while consumer discretionary and the tech sector are expected to be among those struggling the most.

US Dollar Analysis

Stock investors are also very focused on the US dollar’s impact on profits with numerous multinationals (a company operating in several countries) having warned for months that the strong dollar was going to deal a blow.

Again, tech companies are among the most highly exposed to those headwinds, along with the materials sector. Unfortunately for multinationals, upward pressure on the US dollar is expected to continue as currency traders seek a “safe haven” amid the various headwinds circling the globe right now. While the US faces its own growth risks, the economy is nonetheless expected to hold up better than most other advanced economies.

A looming energy crisis in Europe, a faltering new government in Britain, and a deepening slowdown in China stemming from a collapsing property market and ongoing Covid-19 lockdowns are among just a few of the economic issues driving investors to the US currency.

The strong dollar is benefitting consumers somewhat as it helps to battle inflation and lower import prices, which fell for a third month in a row in September. That, however, was largely driven by a -7.5% drop in imported fuel prices, which many experts think is likely to reverse course after OPEC last week decided to cut crude oil production by -2 million barrels per day.

The White House is set to announce new plans this week to combat high pump prices which could include another release from the Strategic Petroleum Reserve or even a cap on US fuel exports.

If you are trading or investing in the energy markets get ready for another wild-ride.

The next big Fed meeting is just over two weeks away. Looking for the end of October and early-November to be extremely volatile.

Stock Investors Are Extremely Anxious in Trying to Pick the Bottom

There’s no doubt traders and investors are extremely anxious in trying to pick the bottom.

Economic Health

Inflation is still running crazy hot, especially some of the stickier things like food inflation, which is running at levels we haven’t seen since the late 1970’s. It also feels like energy prices are trying to creep back higher, and I haven’t really seen any sizable drop in rents.

At the same time, wage growth remains strong, and we aren’t really seeing any massive layoffs or sizable reductions in the labor force. Meaning, the bulls might have just false started again.

Some bulls are again spinning the higher CPI read as “peak” inflation but a growing number seem to believe the Fed is going to reverse course sooner than expected over other economic concerns.

Fallout in the US job market would likely be the first area to raise alarms for the Fed. But with unemployment only at 3.5%, many economists believe there is room for the Fed to lift rates and keep them there for much longer than Wall Street is anticipating.

Others believe that issues brewing in other financial markets or institutions are likely to convince the Fed to make smaller rate hikes or even pause them. That is coupled with the fear that a financial mishap ends up sparking a wider financial crisis that has a domino effect across global markets.

In case you are wondering, the markets are forecasting about a 95% chance that the Fed hikes rates another +75 basis-point at its upcoming November 2nd FOMC meeting. And about a 70% chance that they hike another 75 basis-points at the December 14th FOMC meeting.

Data to Watch

Several key economic reports are out today, including Retail Sales, Import/Export Prices, Business Inventories, and Consumer Sentiment. Retail Sales and Consumer Sentiment are going to be of particular interest as positive trends there are not indicators of a cooling economy.

Today’s real headline driver is going to be big bank earnings with Citigroup, JPMorgan Chase, Morgan Stanley, US Bancorp, and Wells Fargo all reporting results before markets open this morning.

Turning to next week, data is pretty light with Empire State Manufacturing on Monday; the NAHB Housing Market Index on Tuesday; and Housing Starts and Building Permits on Wednesday. By contrast, Q3 earnings significantly pick up the pace next week with Bank of America, Bank of New York Mellon, and Charles Schwab on Monday; Albertsons, Hasbro, Interactive Brokers, JB Hunt, Johnson & Johnson, Lockheed Martin, Netflix, and United Airlines on Tuesday; Abbott Laboratories, Alcoa, ASML Holdings, Baker Hughes, IBM, Kinder Morgan, Las Vegas Sands, Nasdaq, NextEra Energy, PPG, Procter & Gamble, Prologis, and The Travelers Companies on Wednesday; Alaska Air, American Airlines, AT&T, Barclays, Blackstone, CSX, Danaher, Dow, Ericsson, FreeportMcMoRan, Nokia, Nucor, Philip Morris, Robert Half, Snap, SnapOn, Tractor Supply, Union Pacific, and Whirlpool on Thursday; and American Express, Goldman Sachs, HCA Healthcare, Schlumberger, and Verizon on Friday.