October 12, 2022
Good morning,
Futures are up roughly +0.70% (25 pts), pointing to a modest recovery at the opening bell. Pepsi just delivered its quarterly update, and its stock is up +2% premarket, saying consumers continue to purchase more of its snacks and soft drinks despite rising inflation. Not a bad way to jump-start the earnings season, but I fear PEP will be the anomaly. This Trick-or-Treat earnings season may have more tricks for companies not named Pepsi, as they forecast next year’s earnings into what increasingly looks like a recession.
But isn’t the likely earnings slowdown in Q4 and early 2023 already priced in? The S&P 500 Index set a new intra-day low yesterday, now down -26% from its high last January. The market has probably discounted a recession of some sort in the coming 12 months. However, it is unlikely that anything more than a mild, shallow recession is fully discounted into down 26% at this point.
This concept of discounting the future and is it enough or not enough is the argument fueling all the volatility of late. When bulls feel like it has been enough, they expect the Fed to start easing its policy. Last week’s ~+6% two-day move was about the Fed pivoting sometime soon. They were early and the market took those gains away quickly. There are probably three conditions that could lead the Fed to pause; clear evidence that inflation is headed lower, softness in the labor market, and function in the market deteriorating (companies can’t get funding). The first condition is most likely the first of the three to be achieved. The third condition is one we don’t want to see – it likely comes with carnage.
The PPI (Producer Price Index) came out this morning as I’ve been typing: +.4% M/M; est. +.2% / +8.5% Y/Y; est. +8.4%. No sign of inflation slowing when it comes in slightly above estimates. Futures have faded and are, at 9am EDT, +.3%
Tomorrow is CPI (Consumer Price Index), and we’ll see how inflation is filtering down to consumers.
Be well,
Mike