Reaching a Critical Juncture

HIGHLIGHTS:

• Today's Producer Price Index release came in slightly higher than expected, reflecting an 8.5 percent annualized rate.
• The producer-side inflation gauge may be a clue to tomorrow's CPI release, which investors and central bankers will be watching closely.
• Corporate earnings season is underway again, with the bulk of reporting occurring over the next few weeks.
• Financial markets are reaching a pivotal moment that may dictate the direction of the markets over the remainder of 2022.

Uncertainty is growing and investors are monitoring economic releases this week along with corporate earnings results to gauge the direction of stock markets over the near term. After a rally earlier last week, US stocks have slid over the last several trading sessions on speculation that the world's largest economy may be sputtering. Today, the September release of the Producer Price Index—a gauge of price inflation for producers of goods and services—came in marginally higher than expected, bringing the annualized number to 8.5 percent versus estimates for 8.4 percent. The print may seem unremarkable but is a likely clue to the central gauge for inflation, the Consumer Price Index. Tomorrow, the Bureau of Labor Statistics will release last month's results and, based on the producer side of things, the rate of consumer price increases may have remained higher than expected. Currently, economists are predicting that inflation declined to an 8.1 percent annualized pace in September from 8.3 percent in August. This could be a pivotal moment to determine if the Fed's hikes have affected on inflation. If tomorrow's print doesn't show enough progress for central bankers' tastes, it could mean even more rate hikes are in store for the US economy.

Investors are also looking to corporate earnings results as a bright spot amid an overabundance of gloomy news. The third quarter earnings season is just beginning with only a few dozen companies reporting their results by the end of this week. However, the season starts in earnest next week with about 70 names "testifying" to investors, and roughly double that the week after. In June, Wall Street analysts had pegged earnings growth to be 10 percent for the period, but those estimates have dropped meaningfully in recent months. The current forecast for third-quarter earnings growth is 2.4 percent. However, there is a typical trend of corporations beating their estimates by a noteworthy margin. By the end of the quarter, we could see earnings growth of about 6 to 7 percent, which would be fairly similar to last quarter and a resilient outcome given the current landscape. Companies that have already reported cited labor costs, supply chain issues, and foreign exchange as the largest detractors to their bottom line.

The next few weeks will be very telling for the tone of the financial markets for the remainder of 2022, and potentially into next year. Investors will be hoping that the inflation print comes in a bit tamer than expected and that economic data releases are weaker, but not too much weaker, to avoid the Fed getting any more uncompromising with their policy. A moderating in rate policy combined with a stronger-than-expected earnings quarter could help buoy share prices or even lead to stocks paring losses before year-end.

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