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- US CPI rises above estimates as markets take fright.
- Equities fall across the board with even energy falling.
- Bond yields rise sharply with Barclays calling for a 75 basis point hike.
The fallacy of hope is over and reality is finally beginning to dawn. For much of the past two weeks, we have been told by numerous statisticians and economists that inflation would begin to level off as price pressures abated and comparisons eased. In particular, we were fed the bullish line that the rolling nature of the CPI meant comparisons were due to get easier as lower used car prices from last year rolled out and so the overall CPI would level off. This sharply contrasted with what most of us felt every time we went to the gas station and to the grocery store. For those of us fortunate enough to be able to find a building contractor it was difficult to keep up with the scale of price hikes and raw material costs we had to stump up for on a monthly basis. That reality finally made its way down to the CPI print on Friday and the seemingly unprepared investor cohort reacted with obvious shock. Equities quickly shed 3% across most sectors while bond yields surged.
While the incline in CPI does begin to resemble the north face of the Eiger it looks even worse when we scale our chart accordingly and just look at the last 40 years instead of 75! What is more striking is the shadest areas above represent recessions. There appears to be no way that the US can avoid a recession with inflation running this hot. The equity market is not yet fully pricing this in. Corporate earnings estimates are still much too high and analysts will begin to downgrade post the next quarter. The latest data from Refinitiv has Q2 2022 earnings growth averaging at 5.4% based on analyst estimates. They had every reason to be optimistic based on Q1 earnings growth of 11%. Already we are witnessing some pullback to earnings estimates. Excluding the energy sector, the average growth of earnings for Q2 is forecast to fall by 2%.
The bond market has now moved to price in more tightening by year-end and as a results, the yield sensitive Nasdaq had been targetted once more. Growth stocks will continue to be offloaded while value will continue to outperform. But all sectors look set for more losses.
The front end of the bond curve continues to outperform with 2-year rates now above 3%.
However, the curve is flattening now as a recession risk is increasingly priced in by the bond market while the equity market lags behind as ever. Consumer confidence is falling globally and the latest University of Michigan Sentiment Survey confirmed this.
SPY technical outlook
We had been eyeing a move to break $415 as the pain trade was higher. However, this CPI print has now likely obliterated any chance of a break for the foreseeable future. We still feel positioning is overly bearish but this time it appears the crowd is correct. That brings the Fibonacci retracement at $380 into view with $383 being the May low. This level is likely to be key but so far we have witnessed incredibly choppy trading so this move lower may not be smooth. A break of $380 means $350 is increasingly likely.
SPY daily
SPY weekly
Earnings week ahead
Little to excite but some interesting late releases from Kroger, Adobe and Oracle.
Source: Benzinga Pro
Economic releases
There is little to keep an eye on apart from retail sales on Wednesday. That can either confirm or deny the bear market. Consumer demand looks to be holding up as savings are drained but this is a short-term solution. Expect hawkish Fed speak for the week ahead. The bond market remains the key indicator in our view. Yields should march higher and with the added pressure from QT it seems inevitable that the ten-year will begin to move to 4%.
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