Stocks Try To Bounce Back Between Inflation and Earnings Reports

Statements from the Bank of Canada yesterday and the European Central Bank this morning, after both banks held their benchmark interest rates steady, indicate that the “higher for longer” theme on monetary policy continues with bankers leaving the door open to future rate cuts but also indicating no near term plans to do so until they see more signs of inflation being contained.

Inflation reports and commodity price action this week, however, suggests that inflation is anything but contained. Following on from yesterday’s hotter than expected US consumer price report, US headline producer prices were better than expected but worse than last month (2.1% vs street 2.2% and previous 1.6%), while Core PPI accelerated and was worse than expected (2.4% vs street 2.3% and previous 2.0%).  Meanwhile, Gold, a well-known hedge against inflation, continues to climb to new all-time highs up another 0.3% this morning and is trading above $2,350/oz.

Building on yesterday’s inflation-driven breakout, the US 10-year treasury note yield is holding above 4.50% this morning, the UK 10-year Gilt yield has climbed above 4.20%, and the German 10-year Bund yield has moved above 2.45%, all indicating that traders expect central banks to hold rates higher for longer and may potentially have to raise interest rates if inflation accelerates again.

Yesterday’s selloff that started in the US saw follow-through around the clock and into this morning. Hong Kong, Tokyo and Sydney lost 0.25%-0.45% overnight and in Europe this morning, the Dax is down 0.7% and the FTSE has fallen 0.25%. The three main US index futures contracts have rebounded following the PPI news to flat from down 0.4%-0.5%. Commodities are correcting yesterday’s gains a bit. Brent Crude Oil is down 0.2% but holding $90.00/bbl, US Crude and Copper are both down 0.3%, and Natural Gas is down 1.5%.

US earnings season kicks off tomorrow with results from several major banks. Confession season has been quiet so far, supporting expectations for a positive earnings season, but the question remains how much growth has already been priced in by the market gains of the last five months?

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