Last week we warned that the focus would be on macroeconomics and it was. The Fed had entered its pre-policy media blackout period, for which we were all grateful. Prior to entry, it looked like it was going to be an easy week on the results calendar.
As it turned out, the macro would disappoint for the most part, and the gains that were made would have a profoundly negative impact on financial markets. This would put the Fed and Fed officials in the spotlight, regardless of their collective silence.
It all started last Tuesday with an August CPI report that showed both headline and core inflation were hotter than expected for this month. In fact, the year-over-year core rate came close enough to the peak of the cycle, which came last March, to spook those (including this guy) who thought inflation was well past its peak.
On Wednesday, it was August producer prices that, at least in essence, were expected to come in hotter than expected both month-on-month and year-on-year. This sent futures markets into a frenzy along with Treasury yields trying to price in the fed funds rate for the remainder of the year and beyond. A frenzy that also affected stocks and commodities.
Disappointing retail sales in August would provide no respite while both the Philadelphia Fed and Empire State Manufacturing September surveys appear in a state of regional contraction. In summary, by the time all these macros were registered, the Atlanta Fed had revised its real-time GDPNow model for Q3 economic growth to a very weak-looking 0.5% (q/q, SAAR) from an already shaky 1.3%.
Mind you, the US economy had already contracted in real terms for the first and second quarters of 2022. My best guess is that when “they” finally get around to calling this recession, it will go back to January 2022. The third quarter is now on very shaky ground as the current economic contraction threatens to extend to nine months in real terms.
earnings situation
On the corporate side, Oracle (ORCL) issued a downside outlook early last week, followed by the Adobe (ADBE) meltdown. Adobe announced its acquisition of privately held Figma and will likely have to weaken its balance sheet to do so. The company also presented a weaker-than-hoped outlook for the future. However, nothing prepared the markets for the earnings announcement and poor outlook, both of which fell far short of targets for FedEx (FDX). This sparked a widespread call on Wall Street for a global recession, as this company is seen as a leader in a business (parcel delivery) that can be viewed as an indicator of economic health.
About a month before the start of the season in earnest, FactSet’s Q3 expectations for annual earnings growth for the S&P 500 fell to 3.5% last week from 3.7%. The consensus view for third-quarter revenue growth slipped to 8.7% from 8.8%. This lowered the outlook for the full calendar year to 7.8% earnings growth on 10.7% revenue growth from 7.9% earnings growth on 10.8% revenue growth.
Shares
It’s been a very difficult week for equities. As of Friday night there were no indices on my screen showing a weekly gain. In fact, the only two indexes on my screen that lost less than 4% over the five days were the Dow Jones Utility Average and the KBW Bank Index. These two gave up 3.57% and 3.78%, respectively.
The S&P 500 fell 0.72% last Friday to end the week down 4.77%. The Nasdaq Composite lost 0.9% on Friday to end the week down 5.48%. The Russell 2000 was beaten 1.48% on Friday and 4.5% on the week. The Philadelphia Semiconductor Index, on the other hand… actually managed to climb 0.53% on Friday but still took a 5.83% hit on the week. Nine of S&P’s 11 sector-specific SPDR ETFs shaded red on Friday, and all 11 ended the week down. All 11 of those funds are down at least 2.34% this week, with nine of the 11 down at least 3.5%. Five of the 11 were down at least 6%, led by materials (XLB) and industrials (XLI).
Still, the S&P 500 is now trading at 16.4 times forward-looking earnings, up from 16.8 times a week ago, according to FactSet. That ratio is now well below the S&P 500’s five-year average of 18.6 and more than a little below its 10-year average of 17.0.
The real tell for the past week has been fresh post-July lows for the major indices, undercutting the September 6th lows. This action coupled with the increased trading volume for the week, which was not solely due to Friday’s expiration event, pushes the market back into a confirmed downtrend. The attempt to recover markets that started on September 7th and peaked on September 12th, even though you already knew it, is now technically dead.
Using the S&P 500 for illustrative purposes, the daily chart shows the lower low on increased trading volume, with technical room to the downside…
There is a bright side
I know… you were hoping.
Readers will see a “descending, widening wedge” on the weekly chart of the S&P 500, possibly in the early stages of development. This pattern takes a lot of time to fully develop but is considered a bullish reversal pattern. What is required, at least in my opinion, is at least two trendline touches on both the upper and lower trendline. We have. We’d prefer up to five such touches to confirm this.
Is a reversal guaranteed? This is the big league, kid. You will get your at-bats, nothing else is guaranteed. In my experience, the eventual breakout of this type of pattern is bullish about three quarters of the time.
the fed
The coming week will obviously be dominated by the Fed. The FOMC will begin its session on Tuesday and come out on Wednesday with its first policy decision since July 27th and its last until November 2nd.
The group will also present its quarterly economic reviews, which are almost always wrong. These projections are important, however, even if they are often a little crazy, illustrating median conditions that could almost never coexist economically because they still represent the thoughts, or lack thereof, that went and will go into policy implementation. As usual, the press conference, held half an hour after the statement was released, will also focus on policy changes as that is where the Chair calls the next meeting.
At last glance, I see that the futures markets trading in Chicago currently have an 80% chance of a 75 basis point hike in the Fed Funds rate target on September 21st and a 73% chance of another hike by price in at least 75 basis points on 2.11. Keep in mind that the Fed is also increasing the liquidity vacuum (quantitative tightening program) this month. At this point, futures markets are pricing in a year-end fed funds rate of 4.25% to 4.5% and a cycle high of 4.5% to 4.75% in March 2023. That would be an increase from 2.25% today to 2.5%.
You have to know
Of all the corporate events planned for this week, two stand out in my opinion. Number one would be the Nvidia (NVDA) GTC Technology Conference, held Monday through Thursday. CEO Jensen Huang will have the opportunity to spotlight his company and product improvements. The event is heavily attended by the Wall Street community of analysts and one would expect that what these analysts publish publicly will be tradable.
Number two, I believe, will be the Wells Fargo (WFC) consumer conference this Thursday and Friday. Walmart (WMT) . Expected to feature Dollar Tree (DLTR), Target (TGT), Chewy (CHWY), Sysco (SYY) and Five Below (FIVE), among others.
Business (All Times Eastern)
10:00 – NAHB Housing Market Index (Sep): Expect 47, Last 49.
the fed (All Times Eastern)
Fed blackout period.
Today’s result highlights (consensus EPS expectations)
Before the Open: (AZO) (38.62)
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