Equity markets went wild on Wednesday as investors cheered the economic data and then realized its true meaning. The surprise decline in producer-level inflation is good news for those concerned about inflation, but the retail sales figure suggests the damage is already done to the economy. Retail sales are up YOY but fell more than 1.0% monthly as higher prices and rising interest rates cut into consumer spending. The takeaway from the data is that S&P 500 pricing power may be headed out the window as input costs fall and demand for finished goods declines.

The data that investors truly need to watch is the consensus figures for S&P 500 earnings. The consensus figures are in decline for the 1st half of 2023 and are a dead weight for the market to bear. Now that index price action has reconfirmed resistance at the 4,000 level and the top of a downward-sloping channel, it looks like January will end with the market flat to down which is not a good sign for the rest of the year will bring.

Equity markets seesawed on Tuesday as investors and traders brace for what could be a very bad Retail Sales figure. That figure is due out today and could show that retail sales are down -1.0% or more compared to last year. This is big news for the market because it means price hikes no longer offset a decline in volume that began early in 2022. In this light, the recession has begun, and it will most likely get worse before it gets better.

The takeaway is that earnings growth is off the table for most S&P 500 companies in the first half of 2023. The question is how bad the decline will be and how the outlook for the 2nd half will unfold. Last year, there was supposed to be an improvement in the 2nd half that never fully materialized and was offset by inflation and interest rates. That situation may unfold again this year and leave the S&P 500 index at or below 3,500 at year-end.

Equity investors face a tough decision in the weeks ahead. The FOMC is about to hike interest rates by another 50 basis points, and the S&P 500 is on the brink of what could be an abysmal earnings reporting season. The first reports from the banking sector were better than expected but resulted in a downtick in the outlook for Q1 and Q2 earnings, sure to bring the index down with it. The latest news is that analysts expect earnings to decline by at least 0.5% in the first half of 2023, and the estimates are still trending lower.

This week could be pivotal for the S&P 500. The latest read on retail sales is due on Wednesday, which could be weaker than expected. The consensus of economists is for sales to have fallen by at least 1.0%, including the impact of inflation which is up 6.0% versus last year. The takeaway is that economic activity in the retail sector is in contraction on both a volume and a dollar basis and will drag S&P 500 earnings power down with it.

Equity markets had a strong week and finished on a high note, but the S&P 500 is not out of the woods. While bank earnings were better than expected, the outlook for activity in the year's first half is still in decline. The banks revealed increases in credit reserves and credit losses, which will weigh on earnings if an economic recession takes hold.

This week will be another test for the market, both with economic data and earnings. There are several reports, including the monthly retail sales figure, which is among the most important. Retail sales underpin the US economy, and Macy's report highlights cracks in the sector. Peak shopping periods were better than expected in Q4 but offset by weaker-than-expected off-peak times, and we are heading into an off-peak time of year for the consumer.

Equity markets seesawed on Thursday following an as-expected CPI report. The report was as expected and shows inflation declined by 0.1% from the previous month, but the YOY comparisons remain hot. In this scenario, the FOMC can be counted on to hike interest rates by at least 75 basis points before stopping, if not more. The real takeaway is that pressure on the economy will not let up any time soon.

Today's news will be centered around the Big Banks. The US largest banks are reporting earnings today, and the results and outlook will have a bearing on the direction of the S&P 500 this year. As it is, the outlook for earnings continues to sour; if the banks add to this trend, the S&P 500 will likely move lower by the end of the reporting season.

Equity markets advanced on Wednesday and drove the S&P 500 up more than 1.0% at the day's high. The move was driven by an expectation today's CPI figures would confirm a cool-down in inflation, but there is risk in complacency. The FOMC is indicating that interest rates have yet to do their work and is hinting very strongly that peak rates will be higher than the market is pricing and remain that way for longer than expected. A hot number, a hotter-than-expected number, may sway market sentiment again and spark another downdraft in equities.

The next FOMC meeting is less than 3 weeks away and will be a market-moving event. In this case, the FOMC confirms the market's expectations the S&P 500 could regain the 4,200 level within a matter of weeks. The CME FedWatch Tool is pricing at least another 25 basis point interest rate hike with a chance of another 50. The risk for the market is that the statement will confirm the idea that interest rates will continue to move higher despite a cool-down in the CPI data should it come.

Equity markets tried to regain their footing on Tuesday, but the outlook continues to sour, so do not read too much into the move. The FOMC chief Jerome Powell made remarks on Tuesday that point to more rate hikes than the market currently has priced in. If the committee follows through on this hint, interest rates could peak above 5.0% and remain above 5.0% until 2024, provided there is no recession in the interim.

The next big hurdle for the market will come on Friday with the twin releases of the CPI index and bank earnings. The index is expected to show cooling at the monthly and YOY levels but to remain hot relative to the FOMC's target of 2.0%. In this light, the market might expect the FOMC to possibly reduce the pace of interest rate hikes to a 25 basis point pace but to extend the timeframe for hiking into the second half of the year.

Equity markets tried to extend the rebound on Monday but were cut short late in the day. The S&P 500 advanced more than 1.0% in early trading only to reverse course in the afternoon and close closer to breaking even than not. This move is a sign of hopefulness from the market but also of indecision, and that is right, given the news due out later this week. Not only is this the first week of peak earnings season for the Q4 reporting period, but the December CPI is also due out.

The CPI is due on Thursday and is expected to give a mixed signal. The headline figure is forecast to fall while the core rises, leading to hot YOY figures. The YOY figures are expected to cool, but there is risk in this outlook. Even with a cool down, CPI is running above 5% at the headline and core level and almost 3X the FOMC's target rate. In this scenario, the FOMC will continue to hike rates and keep them at elevated levels well into 2023.

Equity markets surged on Friday after the NFP report showed wage growth slowed. The S&P 500 gained more than 2.5% on the news, but traders are warned to caution. The wage growth has slowed, but the remainder of the labor data remains hot, including the JOLTs report on job openings. At the current levels, job openings will continue to spur upward mobility for many Americans and wage inflation simultaneously.

This week could be a big one for the market. Not only does the Q4 earnings season kick off on Friday, but the CPI report is due that day too. It may confirm a peak in inflation, but it will probably not show a sustained downtrend until later this year. The risk is that it will be hotter than expected and leave the FOMC with little choice but to keep raising interest rates. In this scenario, the outlook for S&P 500 earnings will take another hit, and the index may fall along with it.

Equity markets tried to rebound on Wednesday but were cut short by the FOMC minutes. The minutes, released late in the day, confirmed the market's expectation that interest rates would remain elevated for some time. As it is, the estimates have FOMC policy peaking above 5% in 2023 and ending the year at or above 4.5%.

The takeaway is the FOMC could begin to ease back on policy by the end of the year, but there are risks in that outlook. If inflation is not tamped down before they begin to ease, the economic acceleration that follows will drive another round of high prices.

The next hurdle this week is on Friday with the release of the NFP report. The NFP should show another month of strong job gains and wage increases, both good and bad for the economy. A weaker-than-expected report might be good news as it would show current FOMC policy is affecting the inflation situation.