Wall Street awaits Wednesday’s CPI data and the start of earnings season

• Wednesday’s inflation report expected to show CPI m/m: 0.3%e  v 0.1% prior; y/y: 3.1%e v 4.0% prior; Core CPI m/m: 0.3%e v 0.4% prior; Core CPI y/y: :5.0%e v 5.3% prior
• Fed’s Barr on banks: These changes would increase capital requirements overall
• Fed Mester noted that the funds rate will need to move up somewhat further from its current level and then hold there for a while

US stocks are wavering ahead of both a key inflation report that should core CPI remain sticky and what should be a rough earnings season. Friday’s employment report showed a hiring slowdown but also strong wage gains.  What will make this inflation report exciting is that we could see annual headline inflation fall to 2.8%, while core inflation remains hot, bolstered by housing inflation.  The steep decline in annual CPI won’t remain a recurring theme and pricing pressures might remain throughout the summer. 

The big banks will kickoff earnings season and expectations are for the largest loan losses since the pandemic. Considering how high stocks have rushed higher, it will be difficult for this earnings season to deliver strong enough results for fresh highs. 

China’s growth story remains a drag on the global economy.  Perhaps more important for markets was last night’s Chinese prices data.  China saw CPI post the lowest reading in 2 years, with a 0% year-over-year reading, while producer prices plunged 5.4% from a year earlier, the worst decline since December 2015.  It is getting uglier in China and that is why officials are scrambling to deliver more support to real estate developers.  The real estate crisis has been lingering for a couple of years and it is messing up their COVID reopening.  The PBOC is going to do more, but this piecemeal policy support strategy is not working. 

Treasury Secretary Yellen’s trip to Beijing was positive but nothing meaningful was expected to be achieved. Yellen assuaged concerns that harsh restrictions might not get imposed by both countries.  The US needs China’s rare minerals and China needs foreign chips.

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