Corporate Earnings to the Rescue?

The stock market could get a lift from a slew of corporate earnings reports this week.  But, the reports likely need to beat expectations and not contain negative outlooks, given that the macroeconomic/Fed background is not favorable for the market.  Economic growth has to slow, either with or without monetary policy tightening.  Some of last week's US economic data suggest the economy already has begun to slow, which is not good for the profits outlook but could temper Fed officials' hawkish comments.  One positive for the market is that Fedspeak will be missing this week, during which is the standard "blackout" period before the January 25-26 FOMC Meeting. 

Last week's US economic data had some mixed evidence regarding the outlook.  The shockingly weak December Retail Sales raised the possibility that economic growth will slow without much Fed tightening.  Whatever the reasons for the sales drop -- eg, reaction to high prices, covid fears, end of extraordinary child care tax credit, inventory shortages, earlier-than-normal holiday shopping -- consumption growth is not likely to return to the double-digit pace of H121.  The Atlanta Fed model lowered its projection of Q421 Real Consumption to 2.0% (q/q, saar) from 4.0%, putting it at the same near-trend pace seen in Q321.  This was one reason the model's projection of Q421 Real GDP Growth was lowered to 5.0% from 6.8% (still consistent with strong profits). 

The Unemployment Claims data sent a mixed message.  Initial Claims rose above their recent range in the latest week, while Continuing dropped to their lowest level since 1973.  Both figures could have been overly affected by the New Year's holiday.  So, they have to be viewed with caution.  But, they are important since they are the most up-to-date indicator of the overall economy.  The increase in Initial, after flattening out in the prior three weeks, hints of a slowdown in economic growth.  This message has to be confirmed by Continuing Claims in coming weeks to be significant.

The disappointing -0.3% m/m in December Manufacturing Output is weaker than was suggested by jobs data.  Possibly, covid-related sick days kept many workers from the plants (but still counted as employed) or parts shortages, eg chips, impaired production.  If so, manufacturing may remain sluggish, as these reasons may not disappear quickly.  This week's release of  manufacturing surveys -- Empire State and Phil Fed -- may shed light on this possibility.  Consensus looks for a dip in Empire State and a rebound in the Phil Fed.  Their levels should be compared to the H221 average to get a sense of manufacturing strength.

The latest inflation data was not all bad news for the outlook.  To be sure, there was a lot of bad news.  The high December CPI was to be expected, based on supply constraints (particularly in the auto industry) and less-than-normal holiday discounting.  These problems should persist at least into January.  Moreover, prices of consumer-related imports sped up in December, as prices of imports from China ratcheted up.  And, the University of Michigan 5-Year Inflation Expectations measure rose to 3.1%, putting it above its 2.8-3..0% range.  But, a slowdown in the December PPI could filter through to consumer prices in the next few months.