Brace for another nasty inflation report in the week ahead. It will continue to infect corporate earnings and dominate actions by the Federal Reserve.
One prediction, by investment bank UBS, is that consumer inflation hit 8.5 percent in March. That would be a new 40-year high and double the rate of just a year ago. While the UBS forecast predicts Tuesday’s report will mark a peak for price hikes, it likely will harden expectations for faster and higher interest rate hikes by the Federal Reserve in the months ahead.
The central bank has ratcheted up its rhetoric about rising rates and rapidly reducing its $9 trillion of U.S. government and mortgage-backed bonds purchased to help support the pandemic economy. Fed officials have used their clearest language yet that it has gotten serious about its fight against inflation. And that means a higher cost of borrowing.
Just as investors are adjusting, so too are corporations.
More than two out of three S&P 500 companies mentioned inflation in their financial results last quarter. Earnings season begins in earnest in the week ahead, and shareholders will be listening to how inflation is impacting results.
Higher prices can push or pull profits. Energy companies, for instance, can see a jump when prices move up. Consumer staple firms, one the other hand, are paying more themselves for raw materials and may be struggling to pass along all those higher costs to customers, pinching profit margins.
The latest quarter also included Russia starting a war in Ukraine, falling COVID-19 infection rates in the U.S. and rising interest rates. Earnings growth is expected to have slowed to 4.7 percent compared to a year ago. Expect energy firms to show the biggest profit pops thanks to oil around $100 a barrel.
The swings in the stock market reflect investor uncertainty and anxiety. The latest inflation data should remove the little doubt left about the Fed carrying out its tactic, which just adds to the anxiety faced by investors.
