January 14, 2022
Good morning,
The choppy (volatile) consolidation, led by technology, that began last week looks like it will march on right through the end of this week too. The only difference this week is that selling has broadened out – the Russell 2000 is leading indexes down so far this week for example. Worth noting – this week’s selling is not a global affair as international developed and emerging market indexes are in the green week to date.
Not surprisingly, our markets seem preoccupied with 3 digits – 3,4,5. These represent the estimated number of interest rate hikes the Fed may make this year. As recently as last week it was only “2” (I’ve seen a number as high as “8”, but that’s probably some economist looking for attention – no names, please).
The December Retail Sales number is out this morning but estimates are so scattered, it would take an extraordinary outlier to alter the market’s current trajectory. Earnings season kicks off today, and while the start of last quarter’s earnings season began the 4th quarter market rally, it doesn’t look like that will happen again today. Futures were unchanged overnight until JPM, WFC and CCI released their 4th quarter earnings. The overnight market is now down -200+ Dow points and -.70% on the S&P’s. Disappointment with the Banks’ earnings? Probably not, it’s just possible that they weren’t strong enough to reverse concerns about the pace of the Fed’s rate hikes ahead.
Historically markets have consistently reacted to the pace of rate hikes, not the rate hike in itself (it’s a second derivative thing). The point is, as the focus of a faster acting Fed has dampened equity animal spirits this week, it may be helpful to see some data suggesting that inflation will peak this year. Voila! The ISM Price Index fell from strong to neutral inflationary pressure this week, the ISM supplier deliveries inflation signal moved down sharply this week, the number of commodities in short supply plunged this week and the Baltic Dry Index (shipping rates) plunged this week. All this is a little wonky for this venue – with apologies – but if this data and Gundlach’s comments about inflation peaking mid-year are accurate and come to pass, then the digits-above-3 worries will be for naught.
Have a great “3” day weekend!
Be well,
Mike