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Stock investors are treading lightly ahead of several key events this week, including remarks from Federal Reserve Chair Jerome Powell today, critical inflation data due on Thursday, and the “unofficial” start of Q4 2022 earnings season on Friday.
Powell
Some Wall Street bulls are nervous that Powell today could surprise with another hawkish outlook for the Fed, although most expect him to steer clear of any meaningful policy talk.
It's worth noting that the monthly survey from the New York Federal Reserve released yesterday shows that consumer expectations for inflation fell to the lowest level since July of 2021 while spending expectations fell a full percentage point to the lowest level since January 2022.
Bulls believe the declines are yet more justification for the Fed to ease up on its current tightening campaign. Other recent data continues to paint a mixed picture of the US economy and fuel wide divisions on Wall Street about future Fed policy as well as the prospects for stock gains in 2023.
Labor market
On the positive side, inflation gauges continue to decline, consumer spending and job growth is holding up, and home prices have sustained sizable gains despite the softening market. The downside is that inflation is still more than double the Fed's +2% target rate, consumers are racking up considerable credit card debt, the US manufacturing and services sectors have sunk into contraction territory, and businesses are still struggling to attract workers as wage gains eat into margins.
Overall, the strong job market and consumer spending are viewed as a welcome sign that the Fed can still guide the economy toward a “soft landing,” meaning defeat inflation without sending the economy into a recession. Still, many Wall Street insiders remain concerned that the Fed is not paying enough attention to the contractions already happening in the economy and will go too far with interest rate hikes.
Some economists are also warning that the Fed's focus on the labor market may be misguided as job losses tend to become more of a problem once recession hits rather than providing a warning signal beforehand.
Bottom line, many investors are worried that the economy is right on the edge of weakening to a point that a “soft landing” will be impossible.
CPI
The Consumer Price Index on Thursday will provide an update on the inflation situation with consensus expecting another monthly decline. The only data due today is the NFIB Small Business Optimism Index.
On the earnings front, Q4 results “unofficially” begin on Friday with big Wall Street banks, although some results have already started to trickle in. Alberstons is the highlight today. According to FactSet, of the 100 S&P 500 companies that have issued quarterly guidance for Q4, 65 have been negative‚ which is above the five-year average of 57.
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