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Banks Surprise on the Upside

Igor Kuchma
Analysis & Opinion
April 17 2023 06:56AM

Sticks and stones may break my bones but there will always be something to upset the markets.

First the coronavirus pandemic, then inflation, and now corporate results. Even though Friday’s reports came in better than many had feared, analysts still expect a 4.8% decline in S&P 500 earnings.

The paradox is that stronger numbers will not necessarily improve the market’s sentiment, as the threat of further rate hikes by the Fed could loom. For “bulls”, this is akin to the spike in the likelihood of a recession.  

And all would be nothing but the global economy already looks ripe for a downturn. In China, for example, truck traffic on the nation’s highways fell by 8% in the week ending April 9.

In the land of freedom, on the other hand, demand could contract by 2% in 2023. This may sound like nothing but according to S&P (SPI:SP500) analysts, that slump would be the biggest drop in America’s diesel use since 2016.

Overall, there is a 65% chance the US will fall into recession and a 49% chance in the case of Europe. As for the Middle Kingdom, the risk lies not so much in the economic downturn as in the slow recovery.

Well, at least inflation is on the decline, some would say. But is it? First – according to the recent data on the economic calendar, excluding food and energy, the core CPI increased by 0.4% and 5.6% on an annual basis.

Second – in the face of a falling dollar, a rebound in energy prices, as well as the Fed’s reactivation of the printing press, the inflationary monster could return to the stage.

In summary, unless the Beige Book shows that the regulator’s assessment of the current economic situation in the country has been revised downward, the Fed’s policy is most likely to remain tight for the time being.