The primary focus of most market participants and economists has been inflation. There has been much discussion about whether inflation has peaked and how fast it might be dropping. The level of inflation is going to drive how fast and how big the Fed will raise interest rates.
A secondary consideration that hasn't received as much attention is whether the hawkish Fed is going to produce an economic slowdown with aggressive rate hikes. Fed Chairman Jerome Powell has made it clear that is a very likely and maybe even a desired outcome. There is hope that there is enough economic strength that we will have a soft landing.
On Thursday night, FedEx (FDX) announced a significant earnings shortfall for its quarter that ended in May, issue downward guidance for its August quarter and withdrew guidance for fiscal 2023. There are a slew of downgrades and target cuts for FDX, and other companies such as United Parcel Service (UPS) and Amazon (AMZN) are selling off as well.
FedEx isn't just another stock. It is a measure of economic activity, and it is reporting "global volume softness" that accelerated in the final weeks of the quarter. Demand in Asia was weak, Europe was a mess and the CEO said he is seeing US consumers spend more on services than on goods, which is hurting his business.
FedEx's red flags are a concrete sign that the economic slowdown that many are worried about due to the Fed's hawkishness is already gaining traction. There is a lag effect to monetary policy, and there is growing concern about how it is going to leak into the economy as we move into winter.
The positive spin on this news is that the Fed is getting its wish and the economy is already under pressure, which may help with the inflation problem. Perhaps the Fed will pivot to a more dovish stance if the economy starts to fall off a cliff. The problem is that once the economy starts to trend down, it isn't easy to reverse it.
FedEx is likely a signal that we will hear about struggles from more companies as we move into the third-quarter earnings season, which starts in about a month. Economic cooling is coming and it may feel like winter.
We have a gap-down open on tap to start the day and that is taking out key support levels. The June lows are now in sight.
