By Stephen Innes, Chief Global Market Strategist at Axi,
The market could also turn increasingly curious about how industry leaders will address two keen forward-looking items on the top of every investor mind.
First, the margin outlook, including supply chain and commodity input cost pressures and any resulting planned price increase they might pass through.
Second, how severe the potential negative impact is if the Biden administration’s new tax reform proposal is adopted, which could prove to be a significant hit to bottom lines even if the tax hike percentage gets water down.
The fact that stocks remain perched near record highs suggests investors still believe the economic acceleration should be a powerful tailwind for stocks this quarter and ensure earnings growth.
Indeed, earnings tailwinds look set to outweigh concerns around supply chain shortages and rising commodity prices. Importantly, positive earnings and sales revisions have been broad across sectors and industries.
But with significant moves already in place and the ‘easy recovery phase’ money has been made, investors could still temper long duration and rates sensitive assets like gold if yields climb while struggling to resolve what form and fashion the next leg of the reflation trade will take.
Yields, yields, yields
Bond yields are always the most critical macro concern in a rising interest rate environment, especially for the long-duration assets.
In the wake of the robust March jobs report and a slew of other indicators suggesting that economic activity has strengthened in recent weeks, US Federal Reserve officials, including Chair Powell, have taken a more optimistic tone about the baseline economic outlook and the balance of risks around their forecasts.
Indeed, this past week Chair Powell highlighted that the economy could be reaching a positive inflexion point, with growth and hiring possibly on the cusp of accelerating.
Despite this rising sense of optimism about the economic outlook, the relentless push towards higher yields and steeper curves has stalled out in recent weeks as the market awaits fresh catalysts. This week’s data docket could provide the opportunity for sparking the next leg higher.
However, for 8.4 million reasons (US total unemployment), the market could remain in ‘don’t fight the FED mode.’
Most participants are not expecting these strong data points will push the Fed in a more hawkish direction, although rates by their very self-correcting nature due to solid economic activity could move higher.
So, the global equity markets’ reaction to this week’s data docket, possibly via the higher yields feedback loop, will be a keen litmus test that equity investors are happy with growth driving higher yields and continue buying into the Fed’s average inflation targeting (AIT) by allowing the economy to run hot.
