October 14, 2022 —
The bears should pay more attention to earnings and fundamentals, and less to pricing in ever more dire economic predictions. Yesterday’s CPI report was not happy news, with core and headline numbers both (slightly) higher than expectations. On cue, when the numbers came out, markets sold off. But then, on no news or any other perceptible influence, markets started ripping higher.
Compare this price action to the last two events with very negative inflation news: Powell’s Jackson Hole speech where he signaled a more hawkish-than-expected Fed, and the September 13th CPI report, which was also higher than expected. Both events sent markets into a tailspin. But not so with yesterday’s CPI report, which was roughly as negative as the one in September.
What gives? First, a lot of bad news has been priced in. If you’ve read a financial news website or newspaper recently, or listened to the financial pundits, you know what we mean. The litany of negatives is very long. When bad inflation numbers cause the market to go up (a lot), that means a lot of bad news is already in the price.
Second, inflation data are backward looking. Forward looking indicators (breakevens, inflation surveys, anecdotal retailing data, housing markets) are all pointing towards lower inflation. And at some point the Fed and other central banks will have done enough to control inflation.
Third, earnings. We are starting to see corporate America reporting their Q3 or Q4 numbers, and the numbers aren’t as bad as the market expected. Look at bank earnings (Citi, JPM, WFC, etc.) this morning.
There are still many negatives out there in the economy and in global politics (though the U.K. situation appears to be stabilizing as the new government reverses some bad decisions, which is a good thing). Markets may yet sell off again, but much negative sentiment is already in the price.
