Last week we warned that the focus would be on macroeconomics, and it was. The Fed was in their pre-policy decision period for media outages, for which we were all thankful. It looked like, prior to entry… that it was going to be a light week on the earnings calendar.
It turned out that the macro disappointed for the most part, and the gains that were there would have a very negative impact on the financial markets. This would bring the Fed and Fed officials to the fore, regardless of their collective silence.
It all started last Tuesday with an August CPI report showing that both headline and core inflation for the month were higher than expected. The fact is that, on an annual basis, core interest rates came close enough to the peak of the cycle that came last March to scare those (including this man) who thought inflation was well past its peak.Read:US futures rise after lower than forecast inflation data
On Wednesday, it was producer prices for August that at least at the core… would push hotter than expected, month-to-month and year-to-year. This sent futures markets, along with government bond yields trying to price in Fed Funds rates for the remainder of the year and beyond… into a frenzy. A frenzy that also did a song about stocks and commodities.
Disappointing August retail sales offer no respite as both the Philadelphia Fed and Empire State Manufacturing surveys for September are pushed into a state of regional contraction. In all, by the time all these macros were registered, the Atlanta Fed had revised its GDPNow real-time model for economic growth in the third quarter from an already shaky 1.3% to a very weak-looking 0.5% (q/ q, SAAR).Read:Interest-free loans to be rolled out in UK to help with food bills | Borrowing & debt
Keep in mind that, in real terms, the U.S. economy had already shrunk for quarters one and two by 2022. My best guess is that when “they” finally get around to mentioning this recession, it will date to January 2022. The third quarter is now on very shaky ground as the current economic contraction threatens to expand, in real terms. up to nine months.
On the business side, Oracle (ORCL) issued a downward forecast early last week, which was followed by the collapse of Adobe (ADBE). Adobe announced the acquisition of privately held Figma and will likely have to weaken its balance sheet to do so. The company also issued a weaker than hoped for the future. However, nothing prepared the markets for the earnings announcement and the bleak outlook that both missed their mark at FedEx (FDX). This caused widespread calls for a global recession on Wall Street, as this company is considered a leader in a business (parcel delivery) that can be considered a measure of economic health.
About a month before the serious start of the season, expectations for the third quarter, according to FactSet for the S&P 500 year-over-year, fell from 3.7% to 3.5% last week. The consensus on revenue growth in the third quarter has fallen from 8.8% to 8.7%. As a result, the outlook for the full calendar year dropped to earnings growth of 7.8% on revenue growth of 10.7%, from earnings growth of 7.9% on revenue growth of 10.8%.Read:Inside the UK’s first Black farmers market
It has been a very difficult week for equities. Friday night there were no indices on my screen showing a weekly gain. In fact, the only two indices on my screen that gave less than 4% over the five-day period were the Dow Jones Utility Average and the KBW Bank Index. The two entered 3.57% and 3.78% respectively.
The S&P 500 lost 0.72% last Friday and closed 4.77% this week. The Nasdaq Composite lost 0.9% Friday and finished 5.48% this week. The Russell 2000 was hit 1.48% on Friday and 4.5% for the week. The Philadelphia Semiconductor Index, however… managed to gain 0.53% on Friday, but still took a beating at 5.83% for the week. Nine of the S&P sector’s 11 selected SPDR ETFs turned red on Friday and all 11 ended in the red for the week. All 11 of these funds gave up at least 2.34% this week, while nine of 11 lost at least 3.5%. Five of the 11 gave in at least 6%, led lower by Materials (XLB) and Industrials (XLI).
Still, according to FactSet, the S&P 500 is now trading at 16.4 times forward-looking earnings, up from 16.8 times a week ago. This ratio is now well below the S&P 500’s five-year average of 18.6 times, and more than a tad below the ten-year average of 17.0.
The real news from last week was new post-July lows for major indices that undercut the September 6 lows. This move coupled with the increased trading volume for the week, which was not solely due to Friday’s expiration, puts the market back in a confirmed downtrend. The attempt to recover the markets that started on September 7 and peaked on September 12, although you already knew this, is now technically dead.
Using the S&P 500 for illustrative purposes, the daily chart shows the lowest low on increased trading volume, with technical room on the downside…
There is a beautiful side
I know… you hoped.
Readers will see a “falling widening wedge” on the S&P 500 weekly chart, possibly still in its early stages of development. This pattern takes a long time to fully develop but is considered a bullish reversal pattern. What is needed, at least in my opinion, is at least two trendline touches on both the upper and lower trendlines. We have that. We prefer as many as five such touches to confirm.
Is a refund guaranteed? These are the big leagues, kid. You get your at bats, nothing else is guaranteed. In my experience, the ultimate breakout of this kind of pattern is bullish about three quarters of the time.
The coming week will, of course, be all about the Fed. The FOMC goes into session Tuesday and will release its first policy decision since July 27 and its last until November 2.
The group will also present their almost always inaccurate quarterly economic revisions. Those projections are important, however, even if they are often a bit wacky and illustrate conditions at the median that could almost never coexist economically because they still reflect the thoughts, or lack thereof, that have gone into policy implementation and shall go. As usual, the press conference, which will take place half an hour after the statement is released, will be equally focused on any policy changes, as the chairman will host the next meeting.
On the last look, I see that futures markets trading in Chicago are currently estimating an 80% chance of a 75 basis point hike in the Fed Funds rate target on Sept. 21 and a 73% chance of another hike of at least 75 bp. on Nov 2. Keep in mind that the Fed is also ramping up the liquidity vacuum (quantitative tightening program) this month. Currently, futures markets are pricing a year-end Fed Funds Rate of 4.25% to 4.5% and a cycle peak of 4.5% to 4.75% in March 2023. That would be an increase from the current 2.25% to 2.5%.
Out of all the corporate events scheduled for this week, there are two that stand out to me. Number one would be the Nvidia (NVDA) GTC Technology Conference which takes place Monday through Thursday. CEO Jensen Huang gets the chance to put his company in the spotlight and what product developments have been made. The event is heavily attended by the Wall Street analyst community, and you would expect that whatever those analysts put out publicly will be tradable.
Number two, I believe this will be the Wells Fargo (WFC) Consumer Conference Thursday and Friday. Walmart (WMT). Dollar Tree (DLTR), Target (TGT), Chewy (CHWY), Sysco (SYY) and Five Below (FIVE), among many others are expected to be presented.
Economy (All times East)
10:00 – NAHB Housing Market Index (Sept): Expect 47, last 49.
the Fed (All times East)
Powered blackout period.
Today’s Earnings Highlights (Consensus EPS expectations)
Before the Open: (AZO) (38.62)
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