Mid-Market Update: Stocks Fall on Rising Inflation Expectations, JPMorgan Impress, Beyond Meat Job Layoffs, US Data, Kwarteng Sacked, Oil Falls, Gold at Risk, Bitcoin bucks the trend
US stocks were unable to hold on to their gains after inflation expectations rose unexpectedly for the first time in seven months. Wall Street can’t get an idea of how high the Fed will have to take its rates. Last week traders were growing more confident that we would only see 125 basis points more in rate hikes this year, now it looks like we could see 150 this year and also one or two more rate hikes rate of 25 basis points next year. It looks like we need to hear more earnings season pessimism for this market to be confident that inflationary pressures will continue to ease, but that’s not the clear signal we’re getting from banks at the start of the season. benefits.
Earnings season is upon us and if U.S. corporations report significant downgrades to their outlook and job cuts, it could be a sign that inflation will continue to fall and give some investors the green light to test. water.
The big banks launched profits and delivered mixed results. JPMorgan kicked things off with a bang!
A key earnings report that stood out was Beyond Meat. They lowered their outlook and announced layoffs. The factory-based burger maker said around 200 employees would lose their jobs, representing 19% of their global workforce. If this becomes an upward trend in several sectors, the Fed will become convinced that wage pressures will moderate and that inflation should finally subside in basic services.
The earnings season kicked off with a bang as JPMorgan generated record net interest income, investment banking revenue was higher than expected and a plan to resume asset buyouts shares in 2023. JPMorgan led the higher charge for banks. JPMorgan CFO Barnum noted that they expect a slight decline in the 2023 NII from the fourth quarter run rate.
Barnum noted that the consumer is still doing well as credit card delinquencies remain well below pre-pandemic levels. Nominal spending is “still strong” on both discretionary and non-discretionary and this should support spending data for the fourth quarter.
Mr. Doom and Gloom Dimon also appeared to backtrack on some of his recession rhetoric. Dimon said, “I wasn’t predicting a recession….. I don’t know the results any better than you do.”
Overall, the results and comments from JPMorgan suggest that the consumer is holding up despite significant headwinds looming just ahead of this economy. Expectations of a more pronounced slowdown in the fourth quarter might be a little too pessimistic.
Other key bank earnings from Wells Fargo, Citigroup and Morgan Stanley were mixed. Wells Fargo shares rallied after strong declines with both net interest income and revenue. Citigroup shares rose after mixed results that saw a big miss with investment banking revenue, a slight miss with sales and FICC trading revenue, while posting a 6% increase in revenue compared to a year ago.
Shares of Morgan Stanley fell on disappointing investment banking earnings and equity trading revenue.
It was a busy morning with important economic releases, but in the end, the only thing that mattered was that inflation expectations rose. A strong retail sales report will have to take a back seat to the upside move with 1-year and 5-10-year inflation expectations. 1-year inflation rose from 4.7% to 5.1%, while long-term expectations rose from 2.7% to 2.9%, both higher than forecast. The University of Michigan survey showed an improvement in consumer sentiment, economic conditions and expectations, but also showed that inflation expectations have stopped falling. It’s a report, but it coincides with a report on scorching inflation and a market that fears it doesn’t know when the Fed will pivot.
Retail sales have improved and the consumer does not appear to be weakening anytime soon. Expectations of a strong fourth quarter should remain intact and that should alleviate some of the selling pressure hitting consumer discretionary stocks.
BOE Governor Bailey won a critical chicken game as the UK government had to abandon its fiscal policy plan as instability in domestic markets was almost at a tipping point. UK Finance Minister Kwarteng has been sacked over his controversial budget and Jeremy Hunt has been named his successor. A massive tax plan of unfunded tax cuts should be scrapped and now the PM Truss will see if they can do anything.
Oil headlines continue to be very bearish for the crude demand outlook. Intense market volatility does not bode well for growth prospects and this has pushed the dollar higher. The outlook for crude demand continues to be a bearish driver from the world’s two largest economies, as the United States appears to be driven into recession by the inflation-fighting Fed and while China will have no probably no major pivot with its zero COVID policy. US economic activity is not going to collapse, but it is weakening. The most immediate downside driver for oil is the risk of further shutdowns from China.
WTI Crude should find support at the $85 level, but if that breaks, technical selling could target the $82.50 region.
Gold is crushed again as the dollar rallies as Fed rate hike expectations continue to climb. Wall Street is far from convinced it has an idea of how high Fed rates will be and that’s bad news for bullion. Gold’s decline continued after the University of Michigan survey showed that inflation expectations had stopped falling.
Gold is back in the danger zone as it comes perilously close to the September lows. If gold breaks below the $1620 level, the bearish momentum could aim for a run towards the psychological $1600 level.
Given all the red on Wall Street, Bitcoin is holding up well. Risk aversion is running wild and Bitcoin is not breaking. Fed rate hike expectations are rising and Bitcoin still holds at the $19,000 level. Bitcoin’s period of stabilization is good news for long-term bulls and today’s price reaction is somewhat surprising. High-frequency trading systems and hedge funds have their favorite shorts and right now it looks like Bitcoin is becoming a long-term bet for many. If US stocks fall below the 3,600 level this earnings season and Bitcoin does not fall below summer lows, the crypto winter can officially be called off.
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