Surging Dollar, Input Costs Could “Ruin” Earnings Season

Stocks treaded water this morning in anticipation of tomorrow’s June Consumer Price Index (CPI) release. The Dow gained slightly opposite the Nasdaq Composite, which ticked barely lower. The S&P split the difference and traded flat through noon.

Oil prices slid, too, as crude dropped further below $100 per barrel. This was news worth celebrating according to Tamara Basic Vasiljev, senior economist at Oxford Economics.

“Now that the commodity prices are falling again and inflation peak looks to be within reach it is likely that we are seeing the worst of financial conditions tightening,” wrote Vasiljev in a Monday note.

“If so, conditions worsening is dire but the level is still more in favor of [an] orderly slowdown rather than a recession.”

Vasiljev is yet another economist who refuses to admit that a recession has probably already arrived in the US. She is right, however, in that inflation will soon peak, likely due to slumping demand.

That may be reflected tomorrow in the core CPI, which excludes energy and food costs.

“The bottom line is that inflation may stay elevated for another month or two,” wrote Art Hogan, National Securities’ chief market strategist. He continued, adding that the core reading should see “some sequential improvement.”

But investors won’t be interested in hearing about that if the headline CPI comes in hotter than expected tomorrow morning. Dow-polled economists expect a CPI increase of 8.8% year-over-year (YoY), up from May’s 8.6% YoY jump.

Should tomorrow’s CPI report meets the consensus estimate, it will do little to alter the Fed’s coming rate hikes. Which, again, will occur in the middle of a recession as bulls watch in horror.

“There’s a lack of a catalyst, a lack of a leadership right now,” said Truist strategist Keith Lerner.

“Growth is slowing, and global central banks are still in tightening mode and I think that’s concerning the markets.”

All of this uncertainty has contributed to a US dollar rally that began late last month. Today, the euro/dollar pair even reached parity.

“The surging USD is a symptom of global unease and will make life even more difficult for Corporate America (the EPS headwind from FX is going to be enormous) and int’l central banks (as the slumping EUR, GBP, etc., adds to the inflationary pressures in the EU and UK),” wrote Vital Knowledge founder Adam Crisafulli.

Analysts already expected a rough earnings season prior to the USD rally. Following the recent forex trends, though, EPS reports could easily “miss” in a big way.

“Companies are getting squeezed at all sides, they’re getting squeezed on cost of goods and the wages and all things that go into input from our manufacturing goals or services,” said Marathon Asset Management’s Bruce Richards.

“And on the other end, we think revenues are starting to flatten before turning down at a time when interest cost is going up. […] That’s a lot of downgrades, a lot of potential defaults coming from the system as a result of higher charges.”

It could be argued that investors have already priced-in poor earnings. We’ll find out Friday when Wall Street’s major banks kick off earnings season. Until then, tomorrow’s CPI release will control the narrative as stocks face yet another critical moment.


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