US stock trade hits 2022 low ahead of Fed and earnings

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Stocks faltered in a choppy session as traders braced for tech ambassador earnings amid threats from a hawkish Federal Reserve, scorching inflation and a looming economic recession.

Traders became more cautious after last week’s rally, with the S&P 500 closing slightly higher amid year-low intraday volatility and volume. The Nasdaq 100 underperformed results from Apple Inc. and Google’s parent company Alphabet Inc. Walmart Inc. tumbled after it slashed its earnings outlook late in the session. US ten-year yields halted a two-day slide.

This week will be a “decisive” time for investor confidence in the power of American companies, said Nicholas Colas of DataTrek Research. The economy is already feeling the pinch from repeated rate hikes – the Fed is expected to deliver another massive hike on Wednesday – and traders will get more clues as to how much of that slowdown is reflected in earnings.

For now, investors are mostly expecting bad news from megacaps. Amazon.com Inc.’s revenue is expected to grow at its slowest pace in decades. Chipmakers go from boom times to potential glut. Gig-economy companies such as Uber Technologies Inc. and DoorDash Inc. could be victims of consumer budget cuts. And the decline in online advertising is expected to weigh on the results of Facebook owner Meta Platforms Inc.

“For the recent rally to continue, markets need to feel that monetary policy and corporate earnings power are progressively more predictable than they were six weeks ago,” Colas wrote in a note to clients. “Our bias is to lighten up here, but even long-term investors should understand that this week is key to market psychology.”

Strategists at major firms on Wall Street remained split on their view on earnings.

David Kostin of Goldman Sachs Group Inc. sees earnings under pressure from a stronger dollar, while strategists at Bank of America Corp. note that business sentiment on earnings calls is deep in recessionary territory. Meanwhile, strategists at Citigroup Inc. and UBS Global Wealth Management say earnings season is proving better than expected as consumer spending remains resilient.

Investors are skeptical about the Fed’s ability to rein in the worst inflation in four decades without plunging the economy into a recession. More than 60% of 1,343 respondents to the latest MLIV Pulse survey said there was little or no likelihood that the US central bank could contain consumer price pressures without causing an economic contraction.

A feature of a recession is a decline in investment, often driven by a slowdown in inventory building or outright destocking. Durable goods inventories and orders – due Wednesday – will help determine whether a recession is at hand, according to Anna Wong, chief U.S. economist for Bloomberg Economics. She believes both weighed on second-quarter gross domestic product. The Fed’s preferred inflation gauge – the PCE deflator – is released on Friday.

“Naturally, in times of market stress, every week seems crucial,” wrote Jason De Sena Trennert and Ryan Grabinski of Strategas. The strategists added that they remain cautious as “earnings estimates have not yet started to factor in what would appear to be obvious pressures on profit margins.”

In the meantime, Ed Yardeni has some words of comfort – the worst is over for this bear market.

“It’s never easy to hit bottom in the stock market, but I’m going to try,” the president of Yardeni Research told Bloomberg Television. “The real issue is going to be earnings season, and so far earnings season is going reasonably well. It hasn’t really shaken the stock market, and the stock market has held up pretty well.

In corporate news, Apple announced a rare retail promotion in China, offering four days of discounts on its high-end iPhones and related accessories ahead of the launch of its next-generation devices. Intel Corp. secured one of the biggest customers yet for its one-year contract chip manufacturing arm. Regulators are ordering U.S. widebody Boeing Co. 777 operators to repair the planes to address concerns about potential fuel tank explosions, according to a filing released Monday.

Here are some key events to watch this week:

  • Alphabet, Apple, Amazon, Microsoft, Meta gains expected this week
  • Bank of Japan releases June meeting minutes on Tuesday
  • US New Home Sales, Conf. Consumer Confidence Council, Tuesday
  • IMF Global Economic Outlook Update, Tuesday
  • Emergency meeting of EU energy ministers on Tuesday
  • Fed Policy Decision Briefing Wednesday
  • CPI Australia, Wednesday
  • US GDP, Thursday
  • Eurozone CPI, Friday
  • US PCE Deflator, Personal Income, University of Michigan Consumer Sentiment, Friday

Some of the major movements in the markets:

Shares

  • The S&P 500 rose 0.1% at 4 p.m. PT
  • The Nasdaq 100 fell 0.5%
  • The Dow Jones Industrial Average rose 0.3%
  • The MSCI World index was little changed

Currencies

  • The Bloomberg Dollar Spot Index fell 0.2%
  • The euro rose 0.1% to reach US$1.0227
  • The British pound rose 0.5% to reach US$1.2053
  • The Japanese yen fell 0.4% to 136.62 per dollar

Obligations

  • The yield on 10-year Treasury bills rose six basis points to 2.81%
  • Germany’s 10-year yield fell one basis point to 1.02%
  • The UK 10-year yield was little changed at 1.94%

Goods

  • West Texas Intermediate crude rose 2.2% to US$96.75 a barrel
  • Gold futures fell 0.5% to US$1,736 an ounce
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