After stocks surged into the New York close on Friday, profit-taking seems to be the early gates trade. While long-duration stocks look set to drift into the highly anticipated earnings season and keen US CPI print.

With earnings season set to kick off this week, investors prepared by snapping up stocks at a fast and furious pace anticipating that this year’s hottest trades will receive another boost from earnings season. And coming off a busy week for stocks, earnings growth is required to push markets further.

While expectations are high but given the vaccine runway, we are likely not at the end of the upgrade cycle yet. Substantial operating leverage, a forceful rebound in consumer splurge and fiscal stimulus provide the recovery’s key pillars.

As the market shifts back into “don’t fight the Fed mode”, a chorus of Fed speak, and Tuesday’s CPI report will be the main focus for most bond market participants.

In a continuing and common theme over the past several months, energy prices will boost headline CPI. But investors will be much more focused on what is going on at the component level.

Yields losing their tops side moment last week allowed investors to grow more comfortable with the absolute level, and at least until this stage, they were happy with the Fed mantra that ‘growth is driving yields”.

“Don’t fight the Fed” has become the sharp one-liner again that if investors chose to ignore, they might be doing so at their peril. The Fed’s forceful verbal intervention seems to be finding an echo in markets these days. After all, what the central bank wants is typically what it gets, sooner or later.

Interest rates will remain the most important topic for some time and will continue to guide the equity market bus and even more around this earnings season.

Investors will be looking for clarity on the margin outlook, particularly around input cost pressures as squeezed inventories and logistically constrained supply chains add to the bottom line. The big question for bond markets is whether firms have the pricing power to raise prices at the consumer level.

If they do not, in part because the labour market is still in the early stages of recovery, a pick-up in CPI inflation could prove little more than transitory as supply chains improve. That, in turn, would slow the rise in yields.

Beyond input cost, the other primary focus is the potential negative EPS impact if the Biden administration’s new tax reform proposal is adopted. According to the market’s consensus base case, the S&P 500, 2022 EPS growth would diminish from 12% to 5%.

Unsettling calm in oil markets

An unsettling calm has enveloped oil markets recently as Brent remains anchored around $63 and traders adopt a wait and see range trade mentality. All equal, we have likely entered the waiting game, with prices holding ahead of signals that demand inflects higher over the US summer driving season, and Covid related factors start easing worldwide.

Although $63 could be the springboard into summer driving season with OPEC+ and the US expected to add more barrels into this demand. US Energy Secretary Granholm reportedly raised the importance of energy affordability in a call with Prince Abdulaziz early this month. Affordability could be a driving force in OPEC+ new game plan and keeping the border $60-70 range trade in play.

While Covid-19 cases in Europe have started to decline, helped by lockdowns and positive sentiment spurred on as vaccinations should accelerate sharply over the next three months and provide an excellent boost to opinion as the Old Continent returning to standard will be suitable for gasoline demand.

In Asia, however, ‘new waves’ bring risks onshore compounded by the slow vaccine rollout. The vaccine rollout remains slow in Asia, but what is more concerning is a renewed divergence in virus caseloads, with second waves taking hold in India, the Philippines and now Thailand. And continues to sully the global travel outlook.

Traders need to ask themselves who’s next? The street is particularly worried given the spread of new variants and high fatality rates, and the latter could force more stringent lockdowns.

Anecdotally I spent last week working and doing some family business in Hua Hin (a popular local holiday spot). However, as soon as the news hit on Friday that Bangkok and other areas around Thailand are experiencing another wave, the 400-room hotel immediately had 200 cancellations as the fear of the virus tops everything.