US Inflation Expectations Jump, Earnings Season Kicks

Despite the softer-than-expected inflation data released earlier last week, US inflation expectations shocked investors at last Friday’s release; the 1-year expectation jumped from 3.6% to 4.6% due to the surprise surge in energy prices. The expectation was a further easing to 3.5%.

And energy bulls remain in charge of the market, as besides the tighter OPEC supply, the US Energy Secretary Jenifer Granholm said that the US could begin buying oil to refill the strategic reserves and the EIA warned that the global oil demand will rise by 2mbpd to almost 102mbpd. Both helped keeping the price of American crude at around its 200-DMA, a touch below the $83pb level.

Therefore, despite the easing inflation pressures on the CPI figures, the positive pressure building on energy prices and the surging inflation expectations boost the Federal Reserve (Fed) hawks. Combined to waning bank stress, the US 2-year yield – which is a good proxy of what investors think the Fed will do – rose last week, although we are still far below the 5% level before the Silicon Valley Bank (SVB) collapsed. The expectation of a 25bp hike at the next FOMC meeting is given a good 83.5% chance.

In the FX, the US dollar index tested the lowest ytd levels, and formed a triple bottom near the 100.75/100.80 range.

The major peers continue benefiting from a softer dollar to consolidate gains. The EURUSD tested waters above 1.10 last week, and even though the pair is below the 1.10 mark this Monday morning, the recovery could continue toward the 1.1225 mark, the major 61.8% retracement on 2021 to 2022 selloff, as the European Central Bank (ECB) chief Christine Lagarde reminded traders that the bank is ready ‘to act in light of elevated inflation’.

In precious metals, gold trades a few dollars below its all-time-high levels. Resistance is seen into the $2050 level, but a further dollar weakness could push the price of an ounce to a fresh all-time high in the coming weeks.

In equities, the S&P500 was boosted by stronger-than-expected earnings from big US banks. JP Morgan, Citigroup and Wells Fargo took advantage of rising interest rates for two reasons.

Higher interest rates allowed the big banks to make more money out of lending, which resulted in significant gains in net interest income.
Deposit outflows from the small US banks following the SVB collapse, were directed toward the big banks. JP Morgan’s deposits, for example, rose 2% last quarter.
JPM stock rallied more than 7.5% on Friday after the results, Citi rose by almost 5%. Bank of America, Goldman Sachs and Morgan Stanley are due to report their latest quarterly results this week. And investors will be watching how their deposits were impacted by the latest bank stress and how much they benefited from the rising interest rates.

Though, as their peers that reported results last Friday, the remainder of the big US banks could also warn of deteriorating economic conditions, and higher provisions for potential loan losses.

Earnings pessimism is good for stock prices

Earnings expectations for this quarter are not brilliant. The S&P500 earnings are expected to fall around 6% in Q1 this year compared to the Q1 of 2022. And if that’s the case, that will be the first time that y-o-y earnings fall since Covid shock.

That’s bad news. But the good news is, the expectations are driven by conversations with corporate executives which love sounding pessimistic, so that when the results come in better-than-expected, the market reaction could be positive despite soft results.

Besides the big bank earnings, Netflix, Tesla, TSM, Johnson and Johnson and P&G will be among companies that will walk into the earnings confessional this week.