HOT AIR BALLOON FLIGHT

By Julia Horowitz • Sunday, February 20

Good morning. In this week's look ahead: Okay, maybe earnings season wasn't a great distraction. Plus, waiting for the Fed's favorite measure of inflation, and your weekend reads.

 

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MARKET FLASH

Earnings season wasn't a great distraction after all

Corporate earnings season was supposed to turn around Wall Street's sour mood. In the end, it wasn't much of a diversion.

 

What's happening: Most results for the end of 2021 have posted. On the whole, they looked solid. But that wasn't enough to calm nervy investors, who are stressing out about inflation, the Federal Reserve and a potential Russian invasion of Ukraine that could disrupt energy supplies.

 

"The market just feels like it wants to go down," David Coombs, head of multi-asset investments at Rathbones, told me.

 

The CNN Business Fear & Greed Index, which tracks market sentiment, remains stuck in "fear" territory. One month ago, it was producing a "greed" reading.

 

Quick rewind: Earnings growth for S&P 500 companies is tracking at 28% for the fourth quarter of 2021 compared with the same period in 2020, according to The Earnings Scout. That's well above the three-year average. Almost 85% of companies in the index have reported results.

 

But investors have largely brushed off these gains and are instead latching on to uncertainty about the future.

 

"We're strapped in for another two or three months — right through to next earnings season, to be honest," Coombs said.

 

His thought bubble: For the moment, it's all about the inflation data and the Federal Reserve. 

 

At this point, most investors agree that the Fed is behind the curve on fighting inflation and expect the central bank to forcefully intervene when it meets next month. But exactly how hard policymakers will go remains up for debate.

 

David Bianco, DWS chief investment officer for the Americas, said his biggest concern, now that earnings season is wrapping up, is whether a sell-off in government bonds will gather steam, disrupting the broader market.

 

"What I'm really fearful of is the bond market losing confidence in the Fed's ability to tame inflation and bring it down over a reasonable amount of time," Bianco said.

 

Bond yields move opposite prices. So if investors start dumping 10-year US Treasuries and yields spike, it would make stocks look less attractive and ramp up selling pressure.

 

Then there's the situation on the Ukrainian border. While investors have in recent years tended to brush off geopolitics, that's changed in recent weeks.

 

According to Coombs, if tensions between Russia and Ukraine had been building "18 months ago or two years ago, it probably would have been largely ignored." Instead, it's another reason for pessimism — especially because of Russia's influential role as an oil and gas supplier.

 

The run-up in energy prices has been a major contributor to expectations for inflation, which the Fed is watching closely.

 

"It complicates their calculus," Bianco said.

ECONOMY MONITOR

Get ready for the Fed's favorite measure of inflation

It's clear by now that inflation ran red-hot in January. Consumer prices, as measured by the Consumer Price Index, rose 7.5% year-over-year — the fastest increase in four decades. Producer prices leaped 9.7%.

 

No matter. More data is on the way, and the Federal Reserve will be watching closely.

 

The latest Personal Consumption Expenditures Price Index arrives on Friday. As the Fed's favorite measure of inflation, it could jolt stocks if it's higher than expected, indicating the central bank may need to be more aggressive as it hikes interest rates for the first time in years.

 

What comes next: Erik Lundh, principal economist at The Conference Board, wrote in a column for CNN Business last week that inflation "should begin to drop soon."

 

He thinks year-over-year data will "start to tick down" come March, as supply chain problems ease, the effects of the Omicron variant fade and US shoppers start spending more money on services and less on goods.

 

"Consumers can take some solace knowing that large price increases won't go on forever," he said. "The pandemic seems to be easing, and high inflation will, too."

 

That said: According to economists at Citi, a "picture is emerging of inflation that is becoming embedded at levels well-above target." While the Fed aims for 2% inflation, the bank expects the PCE price index to remain at 5.1% in the year to March and near 3.8% around the end of 2022.

 

That could force the Fed to roll back its crisis-era stimulus even faster.

 

"As early as this summer the Fed may consider still-more-aggressive interest rate paths to more substantially slow the US economy if monthly inflation is not returning toward target," Citi's team said.

UP NEXT

Monday: US markets closed

 

Tuesday: S&P Case-Shiller Home Price Index; US consumer confidence; Earnings from Home Depot, Macy's, Toll Brothers and Virgin Galactic

 

Wednesday: Earnings from TJX, Allbirds, Bath & Body Works, Booking Holdings, Hertz and Live Nation

 

Thursday: Initial US jobless claims; new US home sales; Earnings from Alibaba, Anheuser-Busch InBev, Cars.com, Moderna, Nikola, Papa John's, Planet Fitness, Beyond Meat, Etsy and Monster Beverage

 

Friday: US personal income and spending data; PCE index; Earnings from Cinemark and Foot Locker

WHAT WE'RE READING AND WATCHING

▸ Chamath Palihapitiya out as chair of Virgin Galactic (CNN Business)
▸ America's power grid is increasingly unreliable (Wall Street Journal)
▸ Home prices are climbing as inventory hits new low (CNN Business)
▸ How a cat became a voice for America's unions (CNN Business)
▸ Inside Peloton's epic run of bugled calls and bad luck (FT)
▸ Are rising prices affecting your financial decisions? (CNN Business)