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Technology Stocks : Semi Equipment Analysis
SOXX 426.09-2.0%Feb 3 4:00 PM EST

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Market Snapshot

Dow 31003.74 -103.26 (-0.33%)
Nasdaq 11651.96 +18.42 (0.16%)
SP 500 3927.16 -5.60 (-0.14%)
10-yr Note

NYSE Adv 1588 Dec 1464 Vol 1.0 bln
Nasdaq Adv 1991 Dec 2282 Vol 4.8 bln

Industry Watch
Strong: Energy, Utilities, Consumer Discretionary

Weak: Materials, Real Estate, Consumer Staples

Moving the Market
-- Positive response to August PPI data

-- Upside leadership from mega cap stocks

-- Slight pullback in Treasury yields

-- Weakening US dollar

Closing Summary
14-Sep-22 16:25 ET

Dow +30.12 at 31137.12, Nasdaq +86.10 at 11719.64, S&P +13.32 at 3946.08
[BRIEFING.COM] The stock market had a strong showing compared to yesterday, but that's not a big feat. The August PPI report came in better than yesterday's August CPI report, which alleviated some of the selling pressure in the Treasury market and fueled buy-the-dip interest that disproportionately benefitted mega cap stocks. The major indices saw some whipsaw price action, but ultimately closed with modest gains.

Strength from mega caps really drove index level performance today as evidenced by the Vanguard Mega Cap Growth ETF (MGK) closing with a 0.7% gain compared to a 0.3% gain in the S&P 500. The Invesco S&P 500 Equal Weight ETF (RSP) closed flat.

The advance-decline line paints a picture of a mixed market. Advancers led decliners by an 11-to-10 margin at the NYSE while decliners led advancers by the same margin at the Nasdaq.

S&P 500 sector performance also reflects mixed market action with roughly half of the 11 sectors closing in positive territory. Real estate (-1.4%) and materials (-1.2%) were today's top laggards while energy (+2.9%) and consumer discretionary (+1.3%) rose to the top of the leaderboard.

The materials sector was dragged down by an earnings warning from Nucor (NUE 120.71, -15.39, -11.3%) that followed on the heels of an earnings warning yesterday from Eastman Chemical (EMN 82.12, -1.23, -1.5%).

The energy sector outpaced its peers by a decent margin as oil prices rose above $88.00/bbl driven by a belief that the White House is tacitly attempting to put a floor under oil prices by suggesting it might buy oil around $80.00 per barrel to refill the Strategic Petroleum Reserve. WTI crude oil futures settled 1.3% higher to $88.58/bbl.

The 2-yr note yield, at 3.81% before the August PPI release, settled at 3.77% and the 10-yr note yield, at 3.46% before the release, settled at 3.41%. The US Dollar Index was down 0.1% to 109.67.

Looking ahead to Thursday, market participants will receive the following economic data:

  • 8:30 ET: August Retail Sales ( consensus 0.0%; prior 0.0%), Retail Sales ex-auto ( consensus 0.0%; prior 0.4%), weekly Initial Claims ( consensus 233,000; prior 222,000), Continuing Claims (prior 1.473 mln), August Import/Export Prices, September Empire State Manufacturing ( consensus -13.5; prior -31.3), and September Philadelphia Fed Survey ( consensus 3.0; prior 6.2)
  • 9:15 ET: August Industrial Production ( consensus 0.0%; prior 0.6%) and Capacity Utilization ( consensus 80.3%; prior 80.3%)
  • 10:00 ET: July Business Inventories ( consensus 0.6%; prior 1.4%)
  • 10:30 ET: Weekly natural gas inventories (prior +54 bcf)
Reviewing today's economic data:

  • 09/10 MBA Mortgage Applications Index -1.2%; prior was -0.8%
  • Aug PPI -0.1% vs consensus of -0.1%; prior was -0.4% revised from -0.5%
    • The key takeaway from the report is that producers saw a moderation in price pressures, yet the report also shows that inflation is still far too high and broad based.
  • Aug Core PPI 0.4% vs consensus of 0.3%; prior was 0.3% revised from 0.2%
  • 09/10 EIA Crude Oil Inventories +2.44M; prior was +8.84M
Dow Jones Industrial Average: -14.3% YTD
S&P 400: -14.6% YTD
S&P 500: -17.2% YTD
Russell 2000: -18.1% YTD
Nasdaq Composite: -25.1% YTD

Market dips heading into the close
14-Sep-22 15:30 ET

Dow -181.55 at 30925.45, Nasdaq -14.57 at 11618.97, S&P -15.23 at 3917.53
[BRIEFING.COM] The stock market is losing ground heading into the close. The three main indices are trading near session lows.

Energy complex futures settled higher. WTI crude oil futures rose 1.3% to $88.58/bbl and natural gas futures rose 9.1% to $9.09/mmbtu.

After the close, Adobe (ADBE) will report quarterly results.

Looking ahead to Thursday, market participants will receive the following economic data:

  • 8:30 ET: August Retail Sales ( consensus 0.0%; prior 0.0%), Retail Sales ex-auto ( consensus 0.0%; prior 0.4%), weekly Initial Claims ( consensus 233,000; prior 222,000), Continuing Claims (prior 1.473 mln), August Import/Export Prices, September Empire State Manufacturing ( consensus -13.5; prior -31.3), and September Philadelphia Fed Survey ( consensus 3.0; prior 6.2)
  • 9:15 ET: August Industrial Production ( consensus 0.0%; prior 0.6%) and Capacity Utilization ( consensus 80.3%; prior 80.3%)
  • 10:00 ET: July Business Inventories ( consensus 0.6%; prior 1.4%)
  • 10:30 ET: Weekly natural gas inventories (prior +54 bcf)

Market trades in mixed fashion
14-Sep-22 15:00 ET

Dow -103.26 at 31003.74, Nasdaq +18.42 at 11651.96, S&P -5.60 at 3927.16
[BRIEFING.COM] Major averages are little changed in the last half hour. The Dow trails its peers, down 0.3%.

Market breadth again favors declining issues as the major indices trade in a mixed fashion. Decliners outpace advancers by an 11-to-10 margin at both the NYSE and the Nasdaq.

Most of the S&P 500 sectors trade in the red. Only energy (+2.2%), consumer discretionary (+0.7%), and utilities (+0.6%) exhibit gains currently.

Treasury yields are mixed with the 2-yr note yield up one basis point to 3.77% while the 10-yr note yield is down one basis point to 3.41%.

Nucor dips after downside guidance
14-Sep-22 14:30 ET

Dow -78.05 at 31028.95, Nasdaq +11.86 at 11645.40, S&P -2.74 at 3930.02
[BRIEFING.COM] The benchmark S&P 500 (-0.07%) is in second place to this point on Wednesday afternoon.

S&P 500 constituents Coterra Energy (CTRA 31.89, +1.83, +6.09%), Royal Caribbean (RCL 48.24, +1.80, +3.88%), and Raytheon Technologies (RTX 86.33, +2.61, +3.12%) pepper the top of today's standings. CTRA and RCL are among a bevy of names in the market that are recovering modestly from yesterday's broad-based losses, while RTX gains after being awarded an FAA contract and despite lowering FCF guidance last night as well as cautious sales guidance from today's appearance at a Morgan Stanley conference.

Meanwhile, steel name Nucor (NUE 122.13, -13.97, -10.26%) is today's worst performer after this morning's downside Q3 earnings guidance.

Gold continues inflation-related slide
14-Sep-22 14:00 ET

Dow -72.36 at 31034.64, Nasdaq +19.54 at 11653.08, S&P -2.42 at 3930.34
[BRIEFING.COM] With about two hours to go the Dow Jones Industrial Average (-0.23%) and the S&P 500 (-0.06%) have dipped into negative territory, while the tech-heavy Nasdaq Composite (+0.17%) resists.

Gold futures settled $8.30 lower (-0.5%) to $1,709.10/oz as losses continued following a hotter-than-expected inflation number a day earlier.

Meanwhile, the U.S. Dollar Index is down about -0.3% to $109.47.

Flowserve streams lower as Q3 EPS takes a hit from two events, but more pressing issue emerges (FLS)

Flowserve (FLS), which manufactures pumps, seals, and valves to control the flow of liquids and gases, is streaming lower today after disclosing that a pair of non-recurring events are expected to negatively impact Q3 EPS by $0.18-$0.22.

Specifically, the implementation of a new enterprise resource planning (ERP) system has gone awry at certain high-volume manufacturing and quick response centers in North America. The new system is intended to improve FLS's operational and customer service capabilities, but the transition from the legacy platform has not been smooth, causing volumes to be disrupted. Making matters worse, FLS expects to incur higher-than-anticipated corporate expenses related to annual liability accruals for a third-party actuarial consultant. Combined, FLS projects that these two developments will negatively impact Q3 EPS by $0.18-$0.22.

That's a fairly significant dent to FLS's EPS. For some context, the company guided for FY22 EPS of $1.50-$1.70 when it reported Q2 results on July 27. Beyond the sheer financial impact, the perception that FLS dropped the ball from an execution standpoint may also ding investors' confidence levels in the company's management. However, CEO Robert Rowe stated that the majority of the impact from these developments will be limited to Q3, adding that FLS has made significant progress recently with the ERP implementation.

Furthermore, Rowe commented that FLS continues to generate strong bookings in Q3, positioning the company to potentially achieve its highest bookings quarter of the year. Last quarter, bookings increased by nearly 10% to $1.04 bln, marking back-to-back quarters with bookings above the $1.0 bln level. Fueling FLS's bookings growth is its 3D strategy (Diversify, Decarbonize, Digitize) as decarbonization and energy transition projects expand globally. In Q2, the 3D categories accounted for a majority of the company's large order bookings.

Given that these hiccups in Q3 shouldn't have a lasting effect, and that bookings trends remain solid, it's a bit surprising that the stock is selling off so sharply. There is another possible explanation, though, for FLS's weakness.

  • While the company's largest end market is the oil and gas industry (~35% of revenue), the chemical industry is also substantial, accounting for nearly 25% of its revenue.
  • Yesterday, specialty chemical producer Eastman Chemical (EMN) sharply lowered its Q3 EPS guidance, partly due to a steeper-than-expected slowdown in the consumable durables end market.
  • EMN's downside guidance was followed by cautious commentary today from chemical giant Dow (DOW) at a Credit Suisse investor event. The company expects Q3 net sales to be lower by $600 mln compared to consensus expectations as demand in Europe weakens, and as the recovery in China sputters. As a result, DOW is temporarily reducing polyethylene production.
While the mishaps in Q3 are aggravating, they aren't overly concerning since the issues are being remedied and should mostly be in the rearview mirror by next quarter. More concerning is the prospect of a significant slowdown in FLS's chemical end market. As a highly cyclical company that's sensitive to changes in macroeconomic conditions, we worry that the healthy bookings growth that FLS is seeing now could dissipate as consumers and business pull-back on spending. Perhaps this concern, rather than the short-term EPS impact from the two non-recurring items, is more to blame for today's weakness.

Johnson & Johnson instills some confidence with stock buyback program as spin-off looms (JNJ)

A day after the markets were badly shaken by a nasty sell-off, Johnson & Johnson (JNJ) is doing its part to restore some confidence by announcing a new $5 bln stock repurchase plan. Relatively speaking, the stock has held up quite well lately, trading lower by just 1% since mid-August, compared to an 8% drop for the S&P 500 during this same stretch. Still, JNJ CEO Joaquin Duato believes that the stock is under-appreciated, stating that shares "are an attractive investment opportunity" given the company's strong cash flow and its lowest level of net debt in five years.

In addition to authorizing the stock buyback plan, JNJ reaffirmed its FY22 adjusted operational sales growth and EPS guidance of 6.5% - 7.5% and $10.65 to $10.75 per share, respectively.

  • By maintaining its outlook, JNJ is easing investors' concerns that inflationary pressures are cutting deeper into margins that it anticipated, especially in the Consumer Health and MedTech segments. Recall that in Q2, inflation caused margins to decline by 270 bps and 210 bps, respectively, in the Consumer Health and MedTech businesses.
  • JNJ's stock buyback authorization comes ahead of its plan to spin-off the Consumer Health segment, which is expected to occur in 2023. This is likely not a coincidence as Consumer Health has weighed JNJ down for quite some time, partly due to the deluge of litigation and negative public relations surrounding its talc-based baby powder.
    • Despite ramping up brand marketing expenses, adjusted operational sales increased by just 2.9% last quarter, badly lagging the 12.4% growth achieved by JNJ's Pharmaceutical division.
  • Currently, the Pharmaceutical segment represents about 55-60% of JNJ's total business, but that figure will increase to about 65-70% once the Consumer Health spin-off is executed. The higher Pharmaceutical mix is a significant positive from both a sales growth and margin perspective. On a year-to-date basis, as of July 19, 2022, Pharmaceutical's adjusted segment margin was 43.0%, compared to 24.1% for Consumer Health, and 26.7% for MedTech.
    • A major catalyst for JNJ has been the expansion of its oncology, immunology, and hypertension portfolios through acquisitions (Momenta, Aragon, Actelion).
  • On the negative side, the FX headwinds that have battered JNJ are likely to worsen as the dollar continues to strengthen. When JNJ reported Q2 results in July, it estimated that FX headwinds will generate a $4 bln hit to full-year sales, while reducing EPS by $0.65.
    • It wouldn't be surprising if FX impacts cause JNJ to cut its adjusted EPS guidance once again when it reports Q3 earnings on October 18. Unlike adjusted operational EPS, this earnings metric includes the effect of FX. Last quarter, JNJ lowered its FY22 adjusted EPS outlook to $10.00-$10.10 from $10.15-$10.35, after originally guiding for EPS of $10.40-$10.60.
The main takeaway is that JNJ's $5 bln stock repurchase program is not only a positive from an EPS growth perspective, but it also represents a major vote of confidence from its executives as it increasingly leans on its higher-growth Pharmaceutical segment. Looking ahead to next year, the Pharmaceutical business will play on even bigger role once the Consumer Health segment is spun off.

Starbucks raises its FY25 goals, expecting its digital investments to spur meaningful growth (SBUX)

Starbucks (SBUX +5%) shares are steaming today after the company raised its previous FY25 financial targets during its Investor Day yesterday after the close. The global coffee chain also plans to resume its share repurchase program after interim CEO Howard Schultz suspended it amid new sizeable investments into the company.

SBUX's strategic plan dubbed the "Reinvention Plan," focuses on accelerating four essential items, comp, store, and margin growth, as well as disciplined capital allocation, through previously announced investments totaling over $1.0 bln. As a result, SBUX raised its FY25 targets, expecting comps of +7-9% annually (up from +4-5), store growth of roughly +7% annually (up from ~6%), adjusted earnings expansion of +15-20% annually (up from +10-12%), and to return around $20 bln to shareholders through dividends and buybacks between FY23 and FY25.

  • SBUX's earnings expansion is a notable standout given the over $1 bln in incremental investments the company expects to make in FY23. A significant component of SBUX's investments was wage and benefits related, so the combination of likely being able to attract and retain talent while also growing earnings is substantial.
    • Additionally, SBUX continues to expect considerable supply chain disruptions and commodity inflation going forward, meaning that its investments will more than offset these headwinds.
    • SBUX's long-term EPS projection would also mean a return to consistent growth after cost inflation dented yr/yr numbers over the past two quarters.
  • Another highlight is a 3.5 pt bump at the midpoint of SBUX's previous FY25 comparable store sales forecast. Although SBUX did mention that growth will normalize to a range of 4-6% by FY25, this is still up 2 pts from its prior range.
  • Digital investments, as well as opening around eight new stores globally every day, are expected to be the primary fuel behind SBUX's new growth targets. Earlier this week, the company unveiled Starbucks Odyssey, its Web 3.0-based rewards program for the U.S. market. Odyssey will offer rewards members the opportunity to earn and purchase digital assets, making SBUX one of the first publicly traded companies to integrate non-fungible tokens (NFTs) with a loyalty program.
    • Interim CEO Schultz expressed excitement over this initiative during the company's JunQ earnings call last month, noting that it will create a new set of digital network effects to attract new customers. He also expects it to be accretive to existing customers in the company's core retail stores.
Overall, SBUX's raised FY25 financial goals are ambitious. With incoming CEO Laxman Narasimhan, who held various roles at PepsiCo (PEP), focusing on its digital capabilities, stepping in to fill Mr. Schultz's shoes in October, it is clear that many positive developments are brewing for SBUX in the near term. Whether these developments will lead to SBUX achieving its projections by FY25 has yet to be seen. However, we should have a pretty good view into how SBUX's Reinvention Plan is shaping out over the next few quarters.

Nucor surprises with downside Q3 guidance, but we did notice a subtle change on its July call (NUE)

Nucor (NUE -9%) is pulling back after providing downside EPS guidance for Q3. After setting a new record for EPS in Q2 and sounding fairly bullish about Q3 on its call in July, we think investors are a bit surprised with these numbers. Nucor is seen as a bellwether for steel companies, so when it guides lower, that is taken seriously and is not viewed as a one-off situation.

Nucor's guidance is causing several steel stocks to trade lower today: STLD -8%, X -8%, CLF -7%, ZEUS -4%, RS -4%, CMC -4%, WOR -3%, MT -2%.

A few things jump out at us:

  • First off, this EPS guidance at $6.30-6.40 is well below consensus and is a pretty big drop from $9.67 in Q2 and $7.28 a year ago. Nucor does tend to be pretty conservative with guidance, so maybe the final numbers come in better than that, but it's still a decent size decline. Nucor cites metal margin contraction and reduced shipping volumes particularly at its sheet and plate mills.
  • When Nucor reported earnings in July, we did notice a slight change in tone, which we told investors about at the time. In June, Nucor said end use demand "remained strong," but then in late July it described demand as "stable and resilient." At the time, we felt that maybe we were nitpicking a bit, but after this Q3 guidance, it turned out to be a valid observation. We will continue to look for subtle changes like this in the future.
  • Unfortunately, Nucor's press release is pretty short and lacks discussion by end market or customer inventory levels, which makes us a bit nervous. Nonresidential construction has been a robust market for Nucor, but now we wonder if rising rates maybe are slowing construction plans. We will find out when Nucor reports full Q3 results in late October.
  • Steel Dynamics (STLD) is Nucor's closest comp as both are mini-mills. It also typically provides guidance around the middle of the last month of the quarter. As such, we suspect it may also guide lower in the next day or so.
Overall, this report definitely takes our expectations for steel earnings down a notch as we head into earnings season next month. We are concerned about the impact of rising rates and there has been talk of a possible recession. Steel is the ultimate cyclical industry, so it will rise and fall with the overall economy. And since steel is an input for so many manufacturing and industrial markets, it also makes us nervous for many industries as they report earnings soon.

The Big Picture

Last Updated: 14-Sep-22 17:02 ET | Archive
August CPI report gets in the way of the Hollywood ending
To put it mildly, the August Consumer Price Index (CPI) did not go over well with either the Treasury market or the stock market. It prompted a violent reaction in both markets because the data were out of sorts with the friendly narratives that had been working their way into the price action leading up to the report.

Everyone should be familiar with those narratives by now. They include peak inflation, peak hawkishness, and a soft landing for the economy.

Well, the August CPI report created a new chapter for those narratives that had an unhappy twist.

Eye on CPI

The Consumer Price Index increased just 0.1% month-over-month in August. Why the hubbub over such a small increase? There were two reasons:

  1. That was worse than the consensus estimate that projected a 0.1% month-over-month decline.
  2. The month-over-month increase occurred despite a 5.0% decline in the energy index that was paced by a 10.6% drop in the gasoline index. In other words, inflation was broad enough to offset the decline in energy prices.
The Consumer Price Index, excluding food and energy, was up 0.6% month-over-month. There were three reasons why that increase sent the markets into a tailspin:

  1. It was double the consensus estimate that called for a 0.3% increase, so it qualified as a major surprise/shock.
  2. It was a byproduct of broad-based inflation pressures that were led by a 0.7% month-over-month increase in the shelter index, which accounted for about 40% of the total increase in core CPI.
  3. It left the year-over-year rate for core CPI at 6.3% versus 5.9% in July. In other words, inflation in the components the Fed believes its policy tools have more influence over worsened in spite of prior rate hikes.

This was not the news the Fed wanted to hear -- and the stock and bond markets instantly knew that. They also knew that it likely meant the Fed is going to stay on an aggressive rate-hike path.

The 2-yr note yield, sitting at 3.50% just before the CPI report, spiked to 3.75%. The S&P 500 plunged as much as 4.6% and suffered its fifth-largest point loss in history. The fed funds futures market priced out any expectation of a 50-basis point increase at the September 20-21 FOMC meeting. Instead, it priced in a 32% probability of a 100-basis point increase at that meeting, meaning it fully expects a rate increase of at least 75 basis points.

Yep, It Was Absurd

Arguably, there was more psychological fallout from the August CPI report than there was anything else. The stock market certainly wanted to believe that the Fed will stay on a glide path to 3.75-4.00% by year end, sit at that level for a bit, and then start cutting rates in 2023.

That was the script, and it was replete with a Hollywood ending of a soft landing for the U.S. economy.

The reason the stock market fallout after the August CPI report was as significant as it was had to do with the market re-thinking that happy ending. Now, it must contemplate an even higher terminal rate for the Fed, the specter of inflation staying higher for longer and, by default, the Fed sticking with a higher terminal rate for longer.

The other unsettling thought was that this will result in an unhappy hard landing for the U.S. economy as the Fed, late to the rate-hike game, overplays its hand and (cliche alert) makes a policy mistake.

This is not a new thought to us. We penned a column here last November entitled An absurd monetary policy position is a risk we should all see coming.

We said then that "The Fed is playing with fire still sitting on the zero bound with the inflation rate at 6.2%, an economy averaging 5.0% real GDP growth, and the unemployment rate at 4.6%. It's an absurd policy position, because it's the same position the Fed had when the inflation rate stood at 0.2%, real GDP was negative 31.2%, and the unemployment rate was close to 13.0%."

We added that the stock market was taking advantage of the absurd policy stance, but understandably so, before cautioning that, the higher the stock market climbs, the harder it will fall when an exogenous shock hits or that policy support gets pulled abruptly.

The S&P 500 closed at 4,682.85 that day. It would eventually climb to 4,818.62 on January 4. Today, it sits at 3,950, down 18% from that high and armed with the knowledge that Russia invaded Ukraine in February and that the Fed is working feverishly to pull its policy support.

Quantitative easing is out, and quantitative tightening is in. The target range for the fed funds rate, at the zero bound at the end of January, is now 2.25-2.50% and destined to hit at least 3.00-3.25% by this time next week. Fed officials are now all jawboning the need to raise rates to get inflation under control and to stay at it as long as necessary.

Better Late than Never

What is that saying? Better late than never?

The Fed arrived late to the inflation-fighting game, but it is now on the playing field, and it means business. Unfortunately, that means trouble for the economy and for investors.

That was the added sting of the August CPI report. Market participants knew that it meant the Fed would be putting through another aggressive rate hike; moreover, with the core rate of inflation moving away from the longer-run goal of 2.0%, they also feared that the rate hike next week won't be the last of the aggressive rate hikes.

The terminal rate, which the market previously had pegged in the 3.75-4.00% range, is now 4.25-4.50%. That moving target is moving in the wrong direction for a stock market that desperately wants the Fed to be its friend again.

That is a major roadblock, too. The Fed desperately wants to get inflation under control, and it has no interest in being the stock market's friend. The Fed sounds as if it is willing to fall on its sword, too, if a hard landing is what it takes to get inflation back to its 2.0% target.

What It All Means

The Fed would like the Hollywood ending of a soft landing, too, but the pace at which it is raising the policy rate, the pace at which market rates and the dollar are following, and the higher interest costs to service the national debt, are diminishing the prospect of a soft landing and raising the potential for a financial accident.

That does not even account for the slowdown that is occurring elsewhere on account of other central banks aggressively raising their policy rates. The slowdown problem isn't just a U.S. problem. It is a global problem and the rapid increase in all these policy rates will have a commutative effect on earnings prospects.

This is not a new revelation for readers. We have been warning about this commutative effect for some time:

July 16, 2021: Interest rates remain the change agent for the bull market
October 8, 2021: Wage inflation is a monetary policy problem in the making
October 22, 2021: Bull market okay until interest rate push comes to shove
November 12, 2021: An absurd monetary policy position is a risk we should all see coming
December 3, 2021: The end of the party is just getting started
December 10, 2021: 2022 stock market return expectations should get dialed down
December 16, 2021: Fed Chair Powell delivers understatement of the year
February 25, 2022: The Federal Reserve is in a bad spot
March 25, 2022: Let the front-loading begin
April 29, 2022: The Federal Reserve is about to cross the Rubicon
June 10, 2022: The Fed has much work left to do to tame the bane of our existence
July 29, 2022: Shelter costs create difficult proving ground for policy pivot
August 10, 2022: Peak inflation? Maybe. Peak hawkishness? Not yet.
August 26, 2022: Powell and the Fed mean business in restoring price stability

What the Treasury market seems to be accounting for more now is the lag effect of the Fed's rapid-fire rate hikes. The yield curve is inverted, which is not a good harbinger for growth. The stock market hasn't succumbed to the recession scenario, which is evident in earnings estimates that still call for year-over-year earnings growth in 2022 and 2023.

Here again readers know we think earnings estimates are still too high. They have been coming down but are apt to come down further knowing that the Fed has more work to do with rate hikes and that the lag effect has more work to do in kicking in for consumers and businesses.

Hence, there was more to the August CPI report than just high inflation. There were monetary policy implications that will make multiple expansion harder to come by given the uncertainty about how far the Fed and other central banks will go with their rate hikes and how fast they have been moving to correct the first policy mistake of not moving at all, or too little, when economic conditions allowed for it.

The ending here has yet to be written, but the writing is on the wall that catch-up efforts to correct the first policy mistake have increased the risk of making the next policy mistake of piloting a hard landing.

-- Patrick J. O'Hare,

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