US stocks are little changed Tuesday, holding on to recent gains as investors digest a weak Richmond Fed Index (-11 vs +1 a month ago) and a mixed set of earnings releases suggesting the stock market is unsure where it sits this week regarding the good news-bad news dichotomy for the US economy.

In recent weeks, the Fed has shifted somewhat to acknowledge signs that inflation is likely cooling and that the economy is expected even to avoid recession. So, this better growth vs inflation narrative has helped to fuel an almost 5% gain in the S&P 500 to start the year.

But as we leg further into earnings season with news from a broader swath of the economy, investors will focus intently on the nuts and bolts of the economy and pay more attention to what Corporate America is saying before making their next directional move.

European equities traded slightly lower even as the latest business sentiment surveys (the Markit Group’s PMI) surprised to the upside. Surprise is a relative term depending on what side of the street you are on. Economists will say 50 is excellent, but with so much optimism in the price, STOXXX600, for example, traders shrug because they are looking for big beats across the boards or at least data coming in above the survey’s high water marks to support all the optimism in the price.



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Oil markets, however, know exactly where they sit on the good news-bad news dichotomy for the US economy.

After hitting a 7-week high, oil prices fell as market participants reassessed the demand outlook amid returning stagflation concerns and trepidation about China’s consumption proclivities post-Lunar New Year amid the expected meteoric rise in Covid cases. Transitory speed bumps or not, oil markets are spot-traded assets and cannot overlook the various short-term shocks and air pockets in the same way discounting assets as equities and bonds can.

China is the least complicated medium-term market driver and will likely support dips to Brent $85-86. Still, with the mainland on holiday, oil traders focused on short-term data machinations where fresh speculative longs got held hostage to sentiment swings.

Although S&P Global’s Flash US Composite Output Index rose to 46.6, better than expected, don’t forget to note that “better” is a relative term. At 46.6, the services gauge was ahead of estimates and the highest since October, but it tipped a seventh month of contraction.

But the cost uptick screams stagflationary when taken in conjunction with the contractionary headline prints, which is an awful screech for bulled oil markets to absorb in the very short term.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said as much on Tuesday.

“The worry is that not only has the survey indicated a downturn in economic activity at the start of the year, but the rate of input cost inflation has accelerated into the new year, linked in part to upward wage pressures,” Williamson wrote. “[That] could encourage a further aggressive tightening of Fed policy despite rising recession risks.”


The EURO is up marginally after weaker US data was worse than the soggy EU PMI data. Still, it suggests that the China reopening hasn’t yet caught the World by storm at the survey level. So at this juncture of the cycle, FX traders adopt the cleanest dirty shirt in the laundry basket strategy, at least in the short term.

Published by Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT