Q4 Earnings and Inflation Updates To Influence Fed’s Move

The S&P 500 is currently trading at or around the same level it was trading at back in mid-May of last year. Technically, however, the bears are quick to point out that we are still in the cycle of posting lower-highs and lower-lows.

Corporate Earnings

This time around most in the trade seem to be less focused on the Fed and now more focused on much of an impact higher rates and high inflation is going to have on US corporate earnings. On the earnings front, several big names are on the calendar this week but there will be added focus on big tech names in particular as layoffs in the sector continue to dominate headlines.

Amazon, Google, and Microsoft added to the industry’s latest round of job reductions last week.

Economy

Keep in mind, while tech companies make up about 20% of the S&P 500 and account for around 10% of US GDP, they only provide a small fraction of US jobs. In total, the tech sector accounts for roughly 9 million jobs, versus the 159.24 million people employed in the US as of December 2022.

The total number of jobs cut by the sector since January of 2022 is about 190,000. Google executives last week explained that the company had hired for a different economic reality, similar to reasons given by other tech companies that went on hiring sprees to keep up with surging demand during the pandemic.

Most tech firms have far more employees than they did at the beginning of 2020. In many cases, companies are reducing staff by downsizing or eliminating unprofitable businesses, which is overall viewed as a good thing by Wall Street.

Data to Watch

Key tech results this week include Microsoft on Tuesday, IBM and Tesla on Wednesday, and Intel on Thursday.

Today’s top US results come from Baker Hughes, Crane, Logitech, and Synchrony Financial.

Turning to economic data, investors are anxious to see both Flash PMIs on Tuesday and the Producer Price Index (PPI) on Friday.

The PMI data will be for January so is a more up-to-date read than PPI, which is through December. The PPI report holds more sway over the Fed, though, with so-called “core” PPI (strips out food and energy) being one of the Fed’s favorite gauges. On a year-over-year basis, the PCE Price Index for November was up +5.5%, versus +6.1% in October, and the core-PCE Price Index was up +4.7%, versus +5.0% in October.Multiple Fed officials last week expressed support for slowing the pace of interest rate hikes at the January 31-February 1, pointing to the recent decline in inflation.

That would mean a 25-basis point hike as opposed to 50-basis points previously. However, most officials also still support the Fed pushing rates slightly above 5%. The Fed funds rate currently stands at 4.25-4.50%. That means perhaps 3 to 4 more hikes of 25-basis points each.

The real question is how long the Fed will need to hold rates at those levels in order to bring inflation back down to the Fed’s target level of 2%… Then how long can companies that are short on cash continue to hold their breath underwater and how will overall profit margins be impacted?