Corporate Earnings Could Help, But ...

The stock market could be helped by a slew of strong corporate earnings reports over the next few weeks.  But, it risks remaining under pressure as long as the Fed threatens to tighten aggressively to fight inflation.   (This risk could be headlined as Fed Chair Powell speaks this week.)   Moreover, Russia/Ukraine fighting is setting up to worsen, which could put further upward pressure on commodity prices and exacerbate shortages.  

The Fed's aggressive anti-inflation talk is problematic for both the Treasury and stock market.   By identifying a problem (high inflation) and then not acting immediately, these markets take on more of a role in solving this problem.  Stocks fall and Treasury yields rise more than they would if the Fed had begun tightening aggressively sooner.  Ironically, Treasuries and stocks could recover somewhat when the Fed actually begins tightening by 50 BPs.  

Meanwhile, last week's March CPI offered some hope that inflation fears may be overdone.  But, it did not suggest the problem is over.  The drop in Used Car Prices underscored the Fed's prior view that some of the high inflation prints resulted from temporary, shortage-induced pressures.  More unwinding of these pressures may eventually be seen -- particularly since motor vehicle production jumped in March and there is evidence from the Industrial Production Report that the chip shortage may be ending.  The March CPI also showed a slowdown in Housing Rent, to 0.4% m/m from 0.5-0.6% in the prior two months.  This may be a fluke, but it also suggests there is a limit on how high prices can go before consumers push back.  Nonetheless, the March pace for Rent is still too high if CPI inflation is to fall to the Fed's 2% (annualized) target.  

Even if Q122 corporate earnings are strong, they may not provide a lasting boost since they could be viewed as temporary in the face of a potentially sharp slowdown in economic activity.   While there are signs that economic growth is slowing, they are not conclusive.  Retail Sales Excluding Autos and Gasoline slowed sharply over February and March.  But, their slowdown could be just the typical pause after a strong month (January).  The Claims data were mixed in the latest week, with Initial up a bit and Continuing down.  The manufacturing sector looks to be in good shape.  The Empire State Manufacturing Index rebounded in April.  And, March Manufacturing Output posted a large increase for the second month in a row.  This week's housing-related data could provide clues as to whether this sector has begun to react to higher long-term yields.  Consensus looks for small declines in March Housing Starts/Permits and Existing Home Sales.