The rally of the major U.S. benchmark indices fizzled ahead of reporting
season which is in full swing this week. Corporate earnings updates from
some of the biggest names are due during the week with Microsoft, Meta,
Amazon, Google and Intel reporting. These five stocks have accounted for
two-thirds of the S&P 500’s gains this year, so their updates will be
scrutinised by investors.
Traders are keenly awaiting data on first quarter GDP due on Thursday,
followed by the Personal Consumption Expenditures (PCE) index – the Fed’s
preferred measure of inflation, and the employment cost index, both due on
Friday. These reports are important and would help refine the final
decision of the Federal Reserve in regard to interest rates.
The first reading on the U.S. annual GDP is expected to slow to 2.0% for
the March quarter, from 2.6% in the fourth quarter of 2022. While the
headline PCE price index is expected to fall, the core reading is forecast
to increase by 0.3% month-on-month and 4.5% year-on-year. The employment
cost index is also expected to tick higher, consistent with still sticky
inflation.
According to the CME’s FedWatch tool there is 90% probability that the
Federal Reserve will announce a 25-basis point interest rate hike at its
May policy meeting on the 3rd of May, which is likely to be the
last one for this cycle. Rates are likely to be on hold from then on with
cuts on the horizon towards the end of the year.
While the containment of the recent banking stress is a big positive,
there’s a growing sense that it will leave its mark on the global economy,
even if the acute phase of the crisis seems to be over. The risks to the
financial system are not as pressing as they were in March but that doesn’t
mean the crisis is over.
While earnings results have been solid so far, this reporting season is not
shaping to be a great one. According to analysts’ projections profits are
expected to drop 6.2% from a year earlier, which would mark the largest
decline since the second quarter of 2020. Estimates have come down
significantly from last year’s highs and while bottom-line beats
significantly outnumber misses, investors’ focus is on forward guidance.
Source: Tradingview
Warnings of recession amid high inflation and high interest rates are
widespread and the International Monetary Fund (IMF) has warned of a
“perilous combination of vulnerabilities” in markets. The Bank of
International Settlements (BIS) warns that central banks are dealing with
high inflation coinciding with very high debt levels, which threatens
economic stability.
The U.S. is in the midst of a “freight recession” as fewer trucks are
delivering goods around the country. The classic recession indicators are
flushing a red light too as the Conference Board’s Leading Economic Index
(LEI) has dropped for the 12th consecutive time.
The U.S. benchmark index gained more than 9% from its March low, fuelled by
increased liquidity from authorities to relieve the regional banking
crisis. As momentum has faded over the past two weeks, investors are
questioning if the rally in the lead-up to first quarter earnings season
could be sustained, as underwhelming quarterly results reinforce the
prospect of deterioration in profit growth.
The rally took a breather around its previous multiple level of resistance
at 4,195 showing that the bulls are running out of steam. The leading
Relative Strength Index indicator broke below its support on Tuesday
showing that momentum has deteriorated, hinting that a potential short-term
pull back is on the cards.
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