Last week, we had warned that the focus would be on macroeconomics, and it was. The Fed had gone into their pre-policy decision media blackout period, for which we were all grateful. It looked like, prior to entry... that it would be a light week on the earnings calendar.
As it turned out, the macro would for the most part, disappoint, and what earnings there were, would have a profoundly negative impact upon financial markets. This would put the Fed and Fed officials front and center, regardless of their collective silence.
It all began last Tuesday with a August CPI report that showed both headline and core inflation for that month to be hotter than expected. Fact is that the core rate, on a year over year basis, came close enough to matching the peak of the cycle, which came this past March to scare those (including this guy) who had thought inflation to be well past apexing.
By Wednesday, it was Producer Prices for August that at least at the core...would print hotter than expectations on both a month over month and year over year basis. This sent futures markets, along with Treasury yields trying to price in the Fed Funds rate for the rest of the year and beyond... into a frenzy. A frenzy that also did a number on equities and commodities.
Disappointing August Retail Sales would offer no respite, while both the Philadelphia Fed and Empire State Manufacturing surveys printing in a state of regional contraction for September. In aggregate, by the time all of this macro had registered, the Atlanta Fed had revised their GDPNow real-time model for Q3 economic growth from an already shaky 1.3% down to a very weak looking 0.5% (q/q, SAAR).
Mind you that the US economy, in real terms, had already contracted for quarters one and two in 2022. My best guess is that when "they" finally get around to calling this recession, it dates back to January 2022. The third quarter now stands on very shaky ground, as the current economic contraction, in real terms, threatens to spread to nine months.
On the corporate side, Oracle (ORCL) provided a downside outlook early last week that was followed by Adobe's (ADBE) meltdown. Adobe announced the acquisition of privately held Figma, and will likely have to weaken the balance sheet to do so. The firm also provided a weaker than hoped for future outlook. Nothing however, prepared the markets for the pre-announcement of earnings and poor guidance that both badly missed their marks at FedEx (FDX) . This caused a broad call for a global recession up and down Wall Street, as this firm is considered a leader in a business (parcel delivery) that can be taken as a proxy for economic health.
A month or so away from kicking off the season in earnest, Q3 expectations, according to FactSet for S&P 500 y/y earnings growth, dropped last week from 3.7% to 3.5%. Consensus view for Q3 revenue growth has dropped to 8.7% from 8.8%. This took the outlook for the full calendar year down to earnings growth of 7.8% on revenue growth of 10.7% from earnings growth of 7.9% on revenue growth of 10.8%.
It was a very difficult week for equities. By Friday night, there were no indexes on my screen that showed a weekly gain. In fact the only two indexes on my screen that gave up less than 4% for the five day period were the Dow Jones Utility Average and the KBW Bank Index. Those two surrendered 3.57% and 3.78%, respectively.
The S&P 500 gave up 0.72% last Friday to close down 4.77% for the week. The Nasdaq Composite lost 0.9% on Friday to finish down 5.48% for the week. The Russell 2000 was bashed for 1.48% on Friday, and of 4.5% for the week. The Philadelphia Semiconductor Index, however... actually managed to gain 0.53% on Friday, but still took a beating of 5.83% for the week. Nine of the 11 of the S&P sector-select SPDR ETFs shaded red on Friday and all 11 ended in the red for the week. All 11 of these funds gave up at least 2.34% for the week, with nine of the 11 losing at least 3.5%. Five of the 11 surrendered at least 6%, led lower by Materials (XLB) and Industrials (XLI) .
Still, according to FactSet, the S&P 500 now trades at 16.4 times forward looking earnings, down from 16.8 times one week ago. This ratio is now well below the S&P 500's five year average of 18.6 times, and more than a tad below its 10 year average of 17.0.
The real tell last week was new post-July lows for the major indexes that undercut the lows of September 6th. This action in conjunction with the elevated trading volume for the week, that were not due only to Friday's expiration event, places the market back into a confirmed downtrend. The attempt to rally the markets that began on September 7th and apexed on September 12th, although you knew this already, is now technically dead.
Using the S&P 500 for illustrative purposes, the daily chart shows the lower low on elevated trading volume, with technical room to the downside...
There Is a Bright Side
I know... you were hoping.
Readers will see on the weekly chart of the S&P 500, a "descending broadening wedge", possibly still in the early stages of development. This pattern takes a great deal of time to fully develop, but is considered to be a bullish reversal pattern. What is needed, at least in my opinion, is at least two trendline touches on both the top and bottom trendlines. We have that. We would prefer as many as five such touches in order to confirm.
Is a reversal guaranteed? This is the big leagues, kid. You'll get your at-bats, nothing else is guaranteed. In my experience, the eventual breakout from this kind of pattern is bullish about three quarters of the time.
The coming week is obviously going to be all about the Fed. The FOMC will go into session on Tuesday and come out on Wednesday with their first policy decision since July 27th and their last until November 2nd.
The group will also present their almost always incorrect quarterly economic revisions. Those projections are important though, even if they are often somewhat whacky and illustrate conditions at the median that could almost never coexist economically, because they still portray the thoughts, or lack thereof, that have gone into and will go into policy implementation. As usual, the press conference, which takes place a half an hour after the Statement is released, will be as focused on as are any changes made to policy as that is where the Chair sets up the next meeting.
At last glance, I see Futures markets trading in Chicago are currently pricing in an 80% probability for a 75 basis point increase to be made to the Fed Funds rate target on September 21 and a 73% chance for another hike of at least 75 bps on November 2nd. Keep in mind that the Fed is also ramping up the liquidity vacuum (quantitative tightening program) this month. At this time futures markets are pricing in a year end Fed Funds Rate of 4.25% to 4.5% and a cycle peak of 4.5% to 4.75% in March of 2023. That would be up from today's 2.25% to 2.5%.
Need To Know
Of all of the corporate events scheduled for this week, there are two that I think stand out. Number one would be the Nvidia (NVDA) GTC Technology Conference that runs from Monday through Thursday. CEO Jensen Huang will get a chance to put the spotlight on his firm and what product advancements have been made. The event is heavily attended by the Wall Street community of analysts, and one would expect what those analysts put out publicly will be tradable.
Number two, I believe will be the Wells Fargo (WFC) Consumer Conference this Thursday and Friday. Walmart (WMT) . Dollar Tree (DLTR) , Target (TGT) , Chewy (CHWY) , Sysco (SYY) , and Five Below (FIVE) , among many others are expected to present.
Economics (All Times Eastern)
10:00 - NAHB Housing Market Index (Sep): Expecting 47, Last 49.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (AZO) (38.62)