Earnings season commences in about 2 weeks, thus suggesting the possibility of profit warnings occurring this week. As noted several times, quarterly economic growth is perhaps the greatest since 2003, thus suggesting profits may exceed dumbed down expectations.
However, labor and material costs have dramatically increased, an increase that is amplified by a brutally competitive landscape, thus suggesting today’s environment may not be fully discounted. Most businesses or managers have not operated in an inflationary environment, believing the recent increase in costs as only temporary.
US News and World Report recently conducted a survey of 1200 people who have bought homes in the past year. The survey indicated that 82% of purchasers were “assured” that they could refinance later at a significantly lower rate. Moreover 84% plan on refinancing at a lower rate.
Mortgage rates have not declined back to levels experienced just two years ago when the prevailing rate was around 3.0%. Rates have instead surged to over 7.25% to 7.5%, the highest level since 2001 according to a headline in the WSJ. About a year ago mortgage rates were under 6%.
Because of the incessant rise in rates, the US News and World Report survey indicated that 55% of recent buyer regret in taking out a mortgage given that rates have not declined as “assured.”
This recency bias is imbedded in market psychology. The number of remaining analysts ( the number of analysts are down about 50% from levels two decades ago given the proliferation of indexing where security analysis is frowned upon) who have experienced an inflationary environment are numbered.
The economy is experiencing boomflation, a term validated by the Vice Chairman of the Federal Reserve, defined as strong nominal growth that generates high inflation. It was about two generations ago the economy last experienced today’s environment.
Will corporate cashflows increase at a pace greater than costs and inflation?
Profit estimates are consistently dumbed down, perhaps setting the market up for success. However, at some juncture, earnings estimates may cease to have great significance given the perception that both analysts and companies alike are “gaming” the system.
Will this be emerging issue reflected in upcoming profit reports?
Commenting on Friday’s markets, Treasuries staged a nominal oversold rebound which permitted equities to post mild gains.
The economic calendar is comprised of several sentiment surveys, manufacturing statistics, housing data and personal/spending data. How will the data be interpreted?
Last night the foreign markets were down. London was down 0.60%, Paris down 0.52% and Frankfurt down 0.65%. China was down 0.54%, Japan up 0.85% and Hang Seng down 1.82%.
Futures are flat. The 10-year is off 13/32 to yield 4.49%.
