Earnings season is in full gear, and traders have been parsing the latest quarterly results to see how surging commodity costs are impacting the bottom line. Inflation has been running hot of late, with March’s Consumer Price Index jumping 8.5% compared to the year before, marking the greatest rate of increase in more than four decades. Management’s guidance is being even more closely scrutinized, particularly as it relates to how successful companies feel they will be in dealing with rising costs.
The markets are likely to remain choppy over the next couple of weeks, as financial results that vary too widely from expectations could be interpreted as bad news. On the one hand, if earnings come in much stronger than expected, the Federal Reserve may have to take bigger steps to cool down the economy and tame inflation, increasing the risk of recession. On the other hand, earnings that fall well short of expectations could signal that the economic recovery is starting to sputter. This also raises the specter of recession or even stagflation—a combination of a stagnant economy and rising inflation.
With no new major developments in the Russia-Ukraine war, and the Fed’s next meeting more than two weeks away, traders have been focused on the bond market, which has become increasingly volatile. Notably, U.S. government bond prices continue to slide as investors adjust to the prospect of continued inflation and rising interest rates. At the end of yesterday’s session, the yield on 10-year treasuries was at 2.87%, the highest close since late 2018. (Yields rise when bond prices decline.) By comparison, the yield was only 1.71% at the start of March.
In what was a volatile session for stocks, the Dow Jones Industrials closed down 39 points yesterday, the broader S&P 500 was off by a fraction, and the tech-heavy NASDAQ slipped 18 points. The major market sectors were mostly down for the day, with the largest declines coming from healthcare (- 1.1%), and consumer staples (-.8%). On the plus side, energy shares gained 1.5%, while financials were up 06%. The price of West Texas Intermediate gained 1.2%, to $108.20 a barrel. Elsewhere on the commodity front, Corn prices hit a nine-year high, while natural gas is trading at levels not seen since 2008.
U.S. stock futures are indicating a slightly positive open when today’s session begins. Elsewhere, Asian markets were mixed overnight, but stocks in Europe are mostly in the red. West Texas Intermediate Crude Oil is down 2.4%, to around $105.60 a barrel.
On the economic front, the U.S. Census Bureau reported this morning that housing starts for March were up nearly 4%, to a seasonally adjusted annual rate of about 1.79 million. Following a higher-than-expected 6.8% increase in February, the consensus had been calling for a decline of around 2%. Additionally, construction permits for new homes, a more forward-looking indicator, were up 6.7% versus the year before, to an adjusted rate of about 1.87 million. Meanwhile, earnings season keeps rolling along, with a number of big hitters releasing results this week, including Tesla (TSLA), American Express (AXP), Procter & Gamble (PG), Travelers (TRV), and Verizon (VZ).
– Mario Ferro
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
