Week Ahead on Wall Street (SPX) (QQQ): Mr. Market prices inflation as transitory, we know how that worked out

Interesting to always note how the narrative is twisted to support exactly what the market wants to do. Last month the University of Michigan's Inflation expectations were cited by the Fed for its knee-jerk panic into hiking rates by 75 basis points. In the immediate aftermath, commentators pointed out how limited the survey is in its scope being based as it is on a few hundred survey responses. Now that the same survey this month shows a modest and it is very modest reduction, everyone is citing it as gospel. Inflation is cured, it's transitory, rally back on for risk assets. Excuse the sarcasm but we are not out of the woods by a long long long way. Equity markets are always the last ones to know and it looks like that feat is repeating itself if the latest developments are anything to go by. Inflation remains on fire and in fact rising and broadening its base. That broadening is the most worrying aspect as it means it will likely last longer than most expect. Transitory is now on the lexicon of investors who are pricing inflation to be brought to its knees by a recession in 2023.

Money markets currently price in a rate cut in the first quarter of 2023 and hilariously expect 75 basis points of cuts for 2023 in totality. That would make this hiking cycle one of the fastest in history followed by one of the quickest pivots in history. Why bother at all then should be the Fed's decision this July! You guys have figured it out for us!

The commodity markets meanwhile are also in full recession mode with oil prices collapsing, copper in freefall, and everything except European gas prices falling sharply on pricing in a global recession and resultant demand suppression. Oil futures prices are in backwardation and pricing in a recession

Meanwhile copper is in freefall 

Copper futures, daily

Wheat prices have also collapsed and are now lower than pre-Ukraine invasion levels.

So with money, bond, and commodity markets pricing in a recession what about the equity market?

Not looking too rosy here then and we have posted repeatedly in past editions about how crazily high analyst estimates are for the S&P 500 for 2023. The average earnings estimate for the S&P 500 (SPX) was at $250 but finally, some sense is prevailing and downward revisions have picked up speed. The current forecast is back to $247 for 2023 a step in the right direction but something in the $ 220s is more appropriate for a recession. That should see the S&P 500 (SPX) back to 3,000 or so based on historical P/E averages. Already things are not looking too good with Amazon Prime day being extended to two days rather than the traditional one and look at this for a raft of heavy reductions. Does not bode well for retail or Amazon!

Inventories are also being slashed as companies look to ditch stuff they are stuck with. There have been anecdotal reports of Walmart and others just paying you to keep your returns as inventory levels are way too high.

Just keep your returns: Stores weigh paying you not to bring back unwanted items - CNN

The situation is likely to get worse with the earnings season ramping up. China lockdowns were blamed for a host of tech-related stocks being hit as Tesla (author is short), Apple, and many others rely on China for both manufacturing and demand. Well, the latest news from China is not good with Friday seeing pretty poor economic data and more lockdowns being reported as covid once again becomes a problem. 

So we remain with our view that the bottom is not yet in but it may be after the next earnings season. But it may need two earnings seasons for this mess to get sorted out and that would tie in with a late autumn, early winter rally which is a historical feature of mid-term years and even more so when the incumbent loses its majority. So let's see if history repeats itself. 

SPY forecast

Still, nothing to get too excited about until the gap at $395 to $401 is filled. That will see a raft of people predicting the bottom is in and set up a nice bear market rally fade. We do see the possibility of an extension to $415 where we would look to go short. Earnings season will be key as it ramps up for the next three weeks. 

Earnings week ahead

Earnings season has begun with Jamie Dimon forecasting a hurricane before Citigroup smashed earnings but then Wells Fargo went back to bearish mode as it too missed like JPM after boosting bad debt provisions. It too must see a hurricane on the horizon. Next week things get really interesting as Tesla and Netflix kick off the once fabled FAANGT sector while Goldman Sachs looks to nail down its preeminent investment bank position. Lockheed Martin should see if all the increased defense spending by governments has yet to follow through to bottom line and or forecasts.

Source: Benzinga Pro

Economic releases

Economic data remains the core focus of most investors due to macroeconomic factors trumping most others in equity valuations currently. None of us active in the markets today have any experience with an inflationary environment, as it last happened in the 70's in any meaningful way. There has been quite a lot of talk re the housing market this week and with perfect timing, we get quite a slew of data next week on that very subject. It seems natural to assume rising rates are going to have an impact the question is just how much.