Rising fears of economic downturn

Investors are on edge as fears of a severe economic downturn return. Data yesterday revealed a sharp slowdown in both US retail sales and manufacturing activity, while producer prices remained above +6%.

Economy

Slowing growth and high inflation are two of the three key components of "stagflation." The third is high unemployment. While payroll data so far does not reflect massive job losses, layoff headlines from the tech and financial sectors are maybe creating the illusion that the job market is cratering.

Bulls want to believe that things may not be as bad as they appear on the surface, however. The decline in retail sales was only -1.1% for the month. Compared to last year, sales in December were up +6%. Bulls are also pointing out that while the Producer Price Index at a year-over-year rate of +6.2% is still far above the Fed's target inflation rate of +2%, it is also a substantial move down from November's rate of +7.3%.

As for layoffs, keep in mind that the tech sector actually only accounts for a small share of the US job market. Overall, layoff announcements remain below pre-pandemic levels.

Data to watch

Today, investors are anxious to hear from Federal Reserve Vice Chair Lael Brainard with bulls hoping she takes a more positive tone about the progress made so far in bringing down inflation. Comments from other Fed officials this week have mostly stuck to the script of "higher rates for longer," and really no cheers about how much it has moved down. In fact, most officials seem more concerned that inflation could spike again if the Fed ends its tightening program too soon.

China's reopening adds to that possibility with some anticipating a surge in commodity prices, particularly energy, which could put upward pressure on global inflation. Economic data today includes Housing Starts and the Philadelphia Fed Index.

On the earnings front, Netflix is one of the biggest highlights with the streaming giants results seen as a preview for what's to come in the weeks ahead when Silicon Valley behemoths start weighing in. Other earnings due today include American Airlines, Concentrix, Fastenal, Netflix, and Procter & Gamble.