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Week Ahead: Inflation, Earnings Results Could Collide, Adding Volatility

By Investing.com (Pinchas Cohen/Investing.com)Market OverviewApr 18, 2021 07:58AM ET
www.investing.com/analysis/week-ahead-inflation-fears-earnings-results-could-collide-adding-volatility-200573681
Week Ahead: Inflation, Earnings Results Could Collide, Adding Volatility
By Investing.com (Pinchas Cohen/Investing.com)   |  Apr 18, 2021 07:58AM ET
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  • Bank earnings beats set up high bars for other, non-financial sector companies
  • Experts will continue to argue about the meaning and significance of inflation; will markets whipsaw?
  • Yields and the dollar are already falling, boosting gold, but we expect that to be a short-term event
  • Bitcoin failed to keep record gains, developing bearish pattern

The much heralded Reflation Trade provided a boost to both Friday's trading and the full equity market rally last week. Similar sentiment is likely to prevail into the upcoming trading week.

All four major US indices—the S&P 500, Dow Jones, NASDAQ and Russell 2000—were buoyed by positive economic data during the course of the week, which lifted benchmarks to back-to-back all-time highs. The news was so bullish that bonds and commodities also rallied.

Long-Term Inflation Or A Return To The Mean?

The Dow shot past the 34,000 threshold for the first time, and the S&P 500 Index closed higher for the fourth week in a row after China’s economy soared, +18.3% in the first quarter, as consumer spending beat expectations, putting the Asian nation on track to join its bigger economic rival, the US, in leading the rest of the world into an economic recovery. This may be an appropriate time to note though, that this growth is in comparison to a year ago, when the global economy was shut down as the spread of COVID-19 became a pandemic.

China’s data on Friday built on a series of strong US releases last week including CPI, Crude Inventories, Initial Jobless Claims and Retail Sales. All of which propelled the MSCI All-Country World Equity Index to a record high.

In the US on Friday, the Materials (+1.2%) and Utilities (+0.8%) sectors gained the most, while Technology (-0.02%) and Communications Services (-0.1%) were in red.

For the week, value sectors such as Utilities (+3.7%) and Materials (+3%) led, while growth sectors Tech (+1.1%) and Communication Services (-0.1%) lagged with Communications the sole sector in the red.

We have often made comparisons between the NASDAQ 100—representing growth stocks that were the biggest beneficiaries from the stay-at-home pandemic environment—and the Russell 2000, whose domestic firms—representing value stocks which lost the most business during lockdowns—stand to gain the most from a reopening economy. While the NASDAQ 100 formed a shooting star, bearish if Monday’s candle closes below the real body of Friday’s candle (open-to-close, excluding intraday highs and lows), the Russell 2000 continues along a potential top.

Russell 2000 Daily
Russell 2000 Daily

The small cap index is potentially forming the right shoulder of a H&S top, as its RSI is testing the top of its falling channel, drawing a negative divergence between momentum and price.

A combination of the arrival of stimulus checks and easing restrictions provided the breeding ground for US retail sales to soar 9.8% MoM in March. The release more than topped estimates to score the second-fastest growth on that metric in 30 years. But is it sustainable?

Though the most recent shopping spree took place after the distribution of the country's third round of 'helicopter money,' presumably there's more where that came from, given the two previous rounds of government fiscal aid, nearly doubled the American personal savings rate, measured versus before the virus. The hope is that a reopening economy along with a higher employment rate and better pay will encourage people to resume spending after they'd been holding back for so long.

As for inflation, the jury is still out. Last week's consumer price release was keenly watched. It rose 0.6% on a MoM basis and 2.6% YoY, the biggest advance since 2008. It’s a matter of contention, however, among economists, what should be included in the CPI measure in order to fairly reflect economic reality.

Energy prices are included in the non-core metric which means gasoline prices—which jumped YoY—are having a disproportionate impact on the measure right now. In comparison, core CPI, which excludes volatile food and energy prices, increased only 1.6% YoY, (though the MoM figure was higher), marginally beating expectations.

This is where it gets especially tricky when trying to make sense of the inflation roadmap. Though it's true that inflation readings have accelerated when compared to the figures from a year ago, it's important to keep in mind that those figures were released after the economy had been shut down during the height of the contagion. That, naturally, some might even say 'artificially' pushed prices lower.

An additional development regarding rates: long-dated Treasuries, including the benchmark 10-year note, declined during the past week, despite rising inflation. That suggests elevated inflation was already priced in.

Perhaps too, it shows lingering faith by investors that the Fed will make good on its promises to keep rates lower for longer.

UST 10Y Daily
UST 10Y Daily

Yields have topped out, after the RSI fell below its uptrend line in late March.

Here's the key question for which we still don't have an answer: after prices rose from last year's lows, and with companies probably passing on the higher cost of production to consumers, will prices become locked into an uptrend, which creates a long-term inflation problem? Or will they level out as the economy reopens, ultimately returning to the mean?

Last week also saw the launch of Q1 2021 earnings season with banks out front, reporting their first quarter results. Lower credit costs—even as investors bet on rising rates which would fill bank coffers—and increased trading activity were a recipe for success, lifting profits for all 13 banks that reported, to well above consensus expectations. That pushed Financials higher, +20.1% YTD, making the sector second only to Energy over the same period.

We need to caution, though, that there's a potential psychological setup in play for this earnings season to be deemed a failure. After banks set a high bar, since they benefit from an optimum recovery environment, will other companies in different sectors that don’t have these rare catalysts for success be able to measure up?

According to FactSet, earnings growth for the first quarter is expected to be +24.5%, the highest YoY growth posted since the third quarter of 2018, which came in at +26.1% . FactSet’s forward earnings are now also better than 2019's peak level, higher by 3%. If history is a guide, earnings grew by an average of 83% following the last three recessions, even after returning to the prior peak (120% after the 1990-1991 consumer debt unwind, 70% after the tech bubble bust, and 60% after the Great Financial Crisis).

On the other hand, we are still contending with a global pandemic, which hasn't been resolved, and has recently been complicated by additional vaccine distribution challenges. Moreover, none of the previous recessions resulted in a total economic shutdown. So really, we’re entering uncharted territory.

While we don’t know whether the current rate of economic growth will indeed be sustainable, we’re pretty sure the market will provide ample price action, making it a target-rich environment for traders.

The dollar fell for a second week, for the first time since mid-February.

Dollar Daily
Dollar Daily

The greenback paused at the 91.50 area, as the bulls and bears that have been pushing the global reserve currency back and forth duke it out, until one group ends up exhausted and the other continues to propel the currency in their preferred direction. The chart illustrates that this price level has been attracting buyers and sellers since Feb. 4, and momentum has found this level as a support since breaking above this late December resistance to become a support in early January.

For now, the impetus seems to be on the side of the small rising wedge between February and April, which is bearish after the preceding plunge. However, we expect any decline now to be temporary, and expect the USD to jump back up, following the large falling wedge between March 2020 and February 2021. Only if the dollar takes out the 89 level, would we be inclined to return to our previous bearish posture.

Our most recent gold trade failed as the price blew out the bearish flag within the narrower, faster falling channel.

Gold Daily
Gold Daily

This created a double-bottom and pushed the price higher, now making its way to the top of the falling channel. The medium trend is still down, which makes a long position risky. Notice that the RSI is now testing the top of its own falling channel.

Though Bitcoin posted a new all-time high last week at $63,729.50, it's currently back under $60K.

BTC/USD Weekly
BTC/USD Weekly

The most popular cryptocurrency by market cap trimmed its weekly advance, forming a weekly shooting star within a rising wedge, potentially bearish after the token's preceding climatic, near 100% rally within five weeks.

Though oil rose slightly last week, it finished down 0.60% on Friday.

Oil Daily
Oil Daily

Crude barely pushed above its rising, and therefore bearish, flag, finding resistance by the right shoulder of a H&S top.

Week Ahead

All times listed are EDT

Monday

21:30: Australia – RBA Meeting Minutes

21:30: China – PBoC Loan Prime Rate: the central bank previously held the rate steady at 3.85%.

Tuesday

2:00: UK – Claimant Count Change: the March print came in at 86.6K.

Wednesday

2:00: UK – CPI: seen to nearly double in March to 0.7% from 0.4%.

6:30: UK – BoE Governor Bailey Speaks

8:30: Canada – CPI: anticipated to have moved to 0.6% in March, from 0.5% previously.

10:00: Canada – Interest Rate Decision: forecast to remain at 0.25%.

10:30: US – Crude Oil Inventories: last week's reading showed a drawdown of -5.889M bbls.

11:00: Canada – BoC Press Conference

Thursday

7:45: Eurozone – Deposit Facility Rate: expected to remain flat at -0.5%.

7:45: Eurozone – ECB Interest Rate Decision: seen to remain unchanged at 0%.

8:30: US – Initial Jobless Claims: predicted to rise to 625K from 576K.

8:30: Eurozone – ECB Press Conference

10:00: US – Existing Home Sales: likely to slip to 6.18M from 6.22M.

Friday

2:00: UK – Retail Sales: expected to fall to 1.5% from 2.1%.

3:30: Germany – Manufacturing PMI: anticipated to retreat to 65.9 from 66.6.

4:00: Eurozone – Composite PMI: forecast to drop to 52.8 from 53.2.

4:30: UK – Manufacturing PMI: previously printed at 58.9.

6:30: Russia – Interest Rate Decision: the central bank is forecast to raise rates to 4.75% from 4.5%.

10:00: US – New Home Sales: to jump to 885K from 775K.

Week Ahead: Inflation, Earnings Results Could Collide, Adding Volatility
 

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Week Ahead: Inflation, Earnings Results Could Collide, Adding Volatility

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Comments (19)
TL Chan
TL Chan Apr 19, 2021 12:01AM ET
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Same for copper, too high now, it will only drop. The world just not short of alternative matrials. Don't fall into other's trap!
TL Chan
TL Chan Apr 19, 2021 12:00AM ET
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No need to buy lumber, plenty of alternatives now.
Adam Paine
Adam Paine Apr 18, 2021 9:55PM ET
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it's funny how fundamentals matter when weakness is present but not at all when they're overbought
Kahindi francis
Kahindi francis Apr 18, 2021 9:55PM ET
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I know right
Pinchas Cohen
Pinchas Cohen Apr 18, 2021 9:55PM ET
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Would you elaborate, Adam?
Patti R Callanhan
Patti R Callanhan Apr 18, 2021 9:55PM ET
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Pinchas Cohen well is literal to have any fundamental weekness to a trademark; weather you can place your ideas.
James Sheehan
James Sheehan Apr 18, 2021 6:41PM ET
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market is gonna take off tomorrow.
Scott Jones
Scott Jones Apr 18, 2021 3:36PM ET
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I can't say how I know, but less contractors are buying lumber right now. ridiculously high costs for plywood and 2x
John Quinn
John Quinn Apr 18, 2021 1:56PM ET
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Hi Pinchas.  if you're viewing the GC chart w/extended hours for a swing trade, I would avoid that and view the daily chart without extended hrs.  You'll see on 3/31, which I believe is the day before you pitched the gold short trade, that the daily candle is bullish, filling the most recent gap down and closing on its high.  The set up was strong enough to suggest a push up to the daily 50 EMA was likely, which would in turn pierce the 1754 potential double bottom neckline and trigger an extended bullish trade up to the daily 200 EMA. I suspect if you viewed it w/o extended your thinking would have been different.
Pinchas Cohen
Pinchas Cohen Apr 18, 2021 1:56PM ET
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Hi John, thanks for your insight. First, I do not use extended hours. Second, I don't know what gap you're referring to. I don't recognize anything particularly bullish about the 31st but I however bullish the candle would be, I woudl not go against a bearish flag, within a falling channel that's withing a larger falling channel.
sabu sabu
sabu sabu Apr 18, 2021 1:52PM ET
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pinchas what is your call on nasfaq
Pinchas Cohen
Pinchas Cohen Apr 18, 2021 1:52PM ET
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Sabu, no trade now
Abdul Wahab
Abdul Wahab Apr 18, 2021 1:49PM ET
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hello traders how are you all who is know Eur/Usd UP or DOW let me, please
gary leibowitz
gary leibowitz Apr 18, 2021 12:39PM ET
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With the US economy exploding out of the pandemic Powell goes on 60 minutes and other TV programs to reiterate inflation is a temporary phenomena and he will allow this to run its course for 2 more years. That alone was the excuse needed to drop the dollar and treasury yields.  The 1929 so called mistake or raising rates was an excuse to correct a huge market bubble.  this time around the FED will close it's eyes and hope for the best. Either way the stock market knows what will hurt earnings and an over bloated asset class.  The crash is only a matter of a short time frame, within months is my best guess.  Russell 2000 has a P/E of 132. SP500 over 42 and RISING despite great earnings.  You will never see 20 P/E before the next crash.
Pinchas Cohen
Pinchas Cohen Apr 18, 2021 12:39PM ET
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I hear you, Gary
Allan De Guzman
Allan De Guzman Apr 18, 2021 12:39PM ET
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Index is going up but small cap company getting crushed...
Morgan Sitz
Morgan Sitz Apr 18, 2021 11:35AM ET
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hey pinchas Cohen so do you think us30 will have a correction before a new high?
Pinchas Cohen
Pinchas Cohen Apr 18, 2021 11:35AM ET
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Hey Morgan Sitz not as long as it's in an obvious uptrend.
Ridwan Muibi
Ridwan Muibi Apr 18, 2021 11:35AM ET
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Nick Burns
Nick Burns Apr 18, 2021 11:00AM ET
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a 3 to 5% pull back on s&p would be nice right about now... feels like it's never pulling back
Pinchas Cohen
Pinchas Cohen Apr 18, 2021 11:00AM ET
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I know what you mean. That's how traders turn complacent.
Anthon Cortes
Anthon Cortes Apr 18, 2021 10:56AM ET
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So a lot of uncertainty next week. The USD has been weakening and there is not anything coming that can be said would give it strong support.Looks like a wait and see situation. Thank you for your thorough analysis.
Pinchas Cohen
Pinchas Cohen Apr 18, 2021 10:56AM ET
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My pleasure, Anthon, and thanks for your comment.
Vicente Gimena Canite
Vicente Gimena Canite Apr 18, 2021 9:52AM ET
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how are you sir
Pinchas Cohen
Pinchas Cohen Apr 18, 2021 9:52AM ET
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I'm peachy, and how about you, Vicente?
Max German
7Max7 Apr 18, 2021 9:38AM ET
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dow -1.8% for the week that is coming watch
Javier Escamilla
Javier Escamilla Apr 18, 2021 9:36AM ET
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Thanks for your work. Very enriching!
Pinchas Cohen
Pinchas Cohen Apr 18, 2021 9:36AM ET
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Thanks, Javier!
Josh Davis
Josh Davis Apr 18, 2021 9:25AM ET
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Dide this gets so old. The fed either said inflation was above or below target. This wrekly inflation fears thread that continues endlessly is nothing shoelrt of hack journalism. We either have the fears or we dont what did jerome powell say 99x already? Either stick to the narrative you create or do truth fact based journalism. I wish i could be this irresponsible at my job and keep it. This is towards https://investing.com and not the author. I have zero clue about the author as a person.
Pinchas Cohen
Pinchas Cohen Apr 18, 2021 9:25AM ET
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Yo Josh. I'm the author, and this piece is my opinion. If you read the article, you'd be aware that there has been data that keeps the theme going. Thanks for your critique.
Nick Burns
Nick Burns Apr 18, 2021 9:25AM ET
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exactly .... wow no one's allowed to have an opinion anymore... not like you didn't present a good amount of info to show your thoughts ...
Pinchas Cohen
Pinchas Cohen Apr 18, 2021 9:25AM ET
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Nick Burns  It's cool. Josh is allowed to have an opinion about my opinoin. Thanks, Nick.
مرتضی دهقان نیری
مرتضی دهقان نیری Apr 18, 2021 9:12AM ET
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Very good
Pinchas Cohen
Pinchas Cohen Apr 18, 2021 9:12AM ET
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Thank you
مجتبی گرمسیری
مجتبی گرمسیری Apr 18, 2021 9:02AM ET
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kgshhajaj
Zjpopsi Lawrence
Zjpopsi Lawrence Apr 18, 2021 9:02AM ET
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how to make money
Zjpopsi Lawrence
Zjpopsi Lawrence Apr 18, 2021 9:02AM ET
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how to make money
 
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