S&P 500 rally suggests falling recession odds – Earnings could change that

The S&P 500 was flat yesterday, as investors tried to make sense of the deluge of company earnings that hit the fan before, during and after the session. Microsoft didn’t gain on better-than-expected earnings, and Tesla announced record profits, but the share price jumped only 5% in the afterhours.  

We are apparently stepping into a period where earnings projections outweigh the better-than-expected results. It makes the price moves harder to predict, however, it also gives us a hint that the S&P500 may have topped a couple of days ago, and more importantly, the market may soon get the fading recession odds straight, if the economic data continues surprising to the downside, as it has been the case at many prints since the start of the year.  

The positive price action in stocks, and the positive price action in bonds suggest that the recession odds became less for stock traders, and more for bond traders since the start of this year. 

In this sense, the odds for central bank policies are also evolving to the dovish side – or mostly.  

Bank of Canada hiked its bank rate by 25bp yesterday and announced to pause.  

The BoC decision spurred the expectation that the Federal Reserve (Fed) could do the same: hike by 25bp next week then pause.  

This is certainly why the dollar index remained under pressure yesterday. The EURUSD is again above 1.0920, as the RSI index warns that the rally is extending into the overbought territory.  

For the Bank of England (BoE), investors are almost sure that the year will end with a 25bp hike due to slowing economy, but Cable is above 1.24 this morning, as some traders still think that the BoE will have to address higher inflation before slowing economy.  

In Australia, however, the surprise rebound in Australian inflation, spurred the Reserve Bank of Australia (RBA) hawks yesterday, and accelerated the Aussie’s appreciation against the dollar.  

In summary, investors’ hearts will continue to swing between slowing economy and easing inflation, and the bumps in inflation along the way. 

But the data will tell who is right and who is wrong. Today, the US will reveal the Q4 GDP data, and the US economy may have grown at a slower pace of 2.6%, versus 3.2% printed earlier. Core durable orders on the other hand may have contracted in December. So any softness, or worse, any disappointment could further weigh on stocks.  

Or not! The direction is very blurry at the moment and the deluge of economic data and earnings could tilt market sentiment in either way.  

Intel, Mastercard, Visa and American Airlines are among companies to report their Q4 earnings today in the US, Volvo and LVMH will report their results in Europe. Chevron and American Express will be going to the earnings confessional tomorrow.  

Elsewhere, news from China is not bad. Both travel and box office numbers show that Chinese people are spending money for travel and leisure. And the latest reports suggest that Chinese households added a massive $2.6 trillion to their bank accounts last year. All this money could be spent on new iPhones, new Louis Vuitton bags, new Tesla cars, and could temper the recession odds.