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Wall Street remains on edge about the aggressive pace of monetary policy tightening by the US Federal Reserve and other global central banks.

Yields and dollar

As both bond yields and the US dollar reach their highest levels in decades, some resulting hiccups in financial markets have highlighted the growing possibility of institutional failure and/or an emerging-market meltdown.

Global bond funds saw the biggest outflows in two decades in the first three quarters of this year as bond values dropped an average of more than -10%. It's worth noting that bond markets are closed today in observance of Columbus Day, though stock and commodity markets are open as usual.

Meanwhile, economists are calling the unrelenting rise in the US dollar a "wrecking ball" that is crushing other global currencies as it amplifies inflation, particularly in developing economies. The dollar is also a threat to US multi-nationals that do business overseas, as well as US exporters.

Many fear the race to beat inflation is pushing the possibility of a so-called "soft landing" out of reach and instead will result in recession and potentially other economic ills.

Housing market

The US housing market and car industry are so far the most obvious victims of skyrocketing interest rates with activity declining sharply for both.

Although prices remain far above pre-pandemic levels, especially housing, higher rates ahead are expected to dent sales of both even further, which is likely to put more downward pressure on prices. That will eventually be good for inflation but in the case of home prices, it risks dealing a serious blow to consumer spending as homeowners watch their equity sink lower.

Big declines in equities could likewise reinforce this reverse "wealth effect"... aka the theory that consumers feel more financially secure about their wealth and thus increase spending when their homes and or investment portfolios are increasing in value.

Wall Street is also concerned a full-blown recession could inflict significant damage on corporate earnings and likewise be compounded if operating costs remain elevated and borrowing costs continue to climb.

Earnings

Wall Street is anxious to see how many of these macro headwinds have impacted Q3 earnings and forward guidance as the season "unofficially" kicks off this week.

Insiders have greatly reduced their expectations over the last few months with S&P 500 companies now expected to post growth of around +2.6% versus +9.8% back in July. Most of that gain is seen coming from the energy sector, however. Stripping out energy companies, S&P 500 earnings are forecast to decline nearly -4%.

Bulls are hoping for less carnage than insiders are forecasting, pointing to the fact that the total number of negative earnings updates has been less than in the previous two quarters. Many bulls even think there could be room to mount another rally if big names this week and next can deliver outstanding results.

In other words perhaps they have lowered guidance enough that many companies will show a "beat", but is it really a "beat" if your expectations have simply been lowered and lowered each month?

Bears of course think expectations still remain too high with bulls and maybe even companies themselves underestimating the demand destruction being inflicted by the growth-killing combo of high inflation and higher interest rates.

Data to watch

Things are off to a slow start at the first of the week with earnings not really picking up steam until Wednesday with PepsiCo, followed by BlackRock, Delta Airlines, Domino's Pizza, Fastenal, The Progressive, Taiwan Semiconductor, Walgreens, and Wells Fargo, on Thursday; and Citigroup, JPMorgan Chase, Morgan Stanley, PNC Financial, United Health, and US Bancorp on Friday.

Economic data this week could also have a big impact on investor sentiment with both the Producer Price Index (PPI) on Wednesday and the Consumer Price Index (CPI) on Thursday providing critical inflation updates. For reference, PPI was running at an annual rate of +8.7% in August while CPI was up +8/3%. Remember, a couple of the biggest down days in the stock market during the past few months have come on days when the CPI and inflationary data has come in hotter than anticipated.

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