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.

Oracle Agrees to Acquire Medical Records Company Cerner

Mergers and acquisitions have been a crucial part of the market for centuries. Oracle is set to embark on its biggest acquisition after agreeing to acquire Cerner.

Oracle to Acquire Cerner for Nearly $30 Billion

A report by the Wall Street Journal earlier today revealed that Oracle has agreed to acquire medical records company Cerner in a deal worth nearly $30 billion. This latest development would be the biggest acquisition in Oracle’s history.

The deal would be all in cash, with Cerner valued at $95 per share or $28.3 billion. The acquisition is expected to be finalized in 2022, allowing Oracle to boost its presence within the healthcare industry. The introduction of health data to its cloud services could make Oracle one of the biggest players in the healthcare sector.

This latest development comes at a time when mergers and acquisitions are increasingly becoming popular. 2021 is the first year that mergers and acquisitions surpassed $5 trillion globally, indicating a growing appetite for bigger companies to swallow the smaller ones.

The technology and healthcare sectors lead the global charge for mergers and acquisitions.

Oracle’s Stock Price Dips, Cerner Rallies

Following the announcement of the deal, the shares of the two companies have behaved differently. The shares of Oracle are down by more than 5% since the United States market opened a few hours ago.

At press time, ORCL is trading at $91.68, down by more than 5% over the past 24 hours. Despite the recent dip, ORCL has performed excellently since the start of the year. ORCL’s value has soared by more than 43% over the last 12 months.

CERN, on the other hand, has seen its value rise by more than 1% since the news was reported a few hours ago. The stock has performed excellently in recent months, rising by more than 16% since the start of 2021. At press time, CERN is trading at $90.48 per share.

Will Earnings Season Bring Volatility To The Stock Market?

The Commerce Department last week reported that the U.S. economy grew at a +6.4% annual rate in the first quarter, slightly below estimates but still strong. If it would have come in real hot and much higher bears would have pointed to fanning the inflation flames even further.

This mindset of “bad-news-could-be-good-news” is helping to keep the stock market at or near all-time highs. If economic data somewhat disappoints it means the Fed stay dovish and accommodative for longer.

Fundamental analysis

That might be important to keep in mind as April data starting this week is expected to be extremely good. The April Employment Report is due next Friday and with upper-end of Wall Street estimates look for upwards of +1 million new jobs being added. Other key April data next week includes the ISM Manufacturing Index on Monday, and the ISM Non-Manufacturing Index on Wednesday.

employment

If the data comes in better than expected the bears will win the nearby battle and have the upper hand when talking higher inflation and the Fed perhaps tightening sooner than anticipated. So this week could be a bit tricky whereas “disappointing-data” could actually be digested as a win for the bulls and “strong data” a win for the bears.

The earnings calendar is packed again next week with big names including Activision Blizzard, Adidas, AllState, Cerner, Cigna, CVS, Dominion Energy, Enbridge, Etsy, Hilton Worldwide, Moderna, Monster Beverage, Nintendo, PayPal, Peloton, Pfizer, Rocket Companies, Square, TMobile, Wayfair, and Zoetis.

COVID-19

Checking in on U.S. progress against Covid-19, the number of adults that have received at least one dose is around 60%-65%, depending on the source. Global cases continue to rise led by India, where new infections have been hitting new record highs every day for weeks now. The country reported a staggering 380k new infections and 3,645 new deaths on Thursday while less than 10% of the population has been vaccinated.

Bottom line, the global restart will not be synchronized like many bulls had hoped would be the case and global growth may continue to struggle. At the moment the U.S. market doesn’t seem to care. It will be interesting to see if increasing inflation and continued global headwinds will eventually come home to roost.

SP500 technical analysis

SP500 earnings season

Earnings season can bring volatility to the stock market. At the beginning of May, cycles turn to the downside. Note, this is only a timing tool and it never shows the amplitude or strength of the move. When cycles are topping, it means we can expect a move down or choppy trading. This is it.

But relying on cycles only is not a good idea. Insider Accumulation Index shows bearish divergence on a daily chart. At the same time, Advanced Decline Line is still strong. The key resistance is around 4250 at the moment. I believe earning season can bring a profit booking to the stock market. If that happens, watch 4000 – 39500. It was a massive resistance and now it might turn into support. Intermarket Forecast is neutral. But if it turns to the downside, we will finally see a pullback in SP500.

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