In comments on the market, Daniel Berkowitz, investment director for investment manager Prudent Management Associates wrote:
All Eyes On Inflation Data And Earnings
The markets shrugged off the IMF’s gloomy economic report this morning, as investors eagerly await March’s CPI data and the start of what is likely to be a rough quarter for corporate earnings.
Tomorrow’s CPI print will go a long way toward helping the Fed calibrate its posture at the May FOMC meeting, assuming no further unpleasant surprises from the banking industry or otherwise.
Q1 2023 hedge fund letters, conferences and more
CPI/PCE inflation data have been a mixed bag lately, with easing across headline metrics though stickiness in other important data cuts like core services inflation excluding shelter. Median CPI has also been accelerating on a year-over-year basis over the last few months.
With each passing day that we don’t see another financial institution unraveling, stronger macroeconomic data are more likely to persuade the Fed to act.
Comments from Fed officials after the last FOMC meeting indicated that uncertainty around financial stability made pressing ahead with the March hike a tough call. The Fed does believe that a pullback in lending as a result of the banking crisis will do some heavy lifting for them in terms of tightening financial conditions, and we do agree.
At this point, a slightly lower terminal rate than the Fed was positioning for before SVB’s collapse seems likely, but the extent of the banking crisis impact is unclear and will likely take months to fully play out.
While another bank failure at this stage is unlikely given the sheer magnitude of government and Fed intervention, we are still keeping our eye on commercial-mortgage-backed securities (CMBS). Prices for triple-B-rated bonds have been justifiably hammered recently given the backdrop of higher interest rates and growing office vacancies in particular.
CMBS generally serve as a barometer for the commercial real estate market at large, much of which is nontraded, and this is particularly important given banks hold roughly half of commercial real estate debt outstanding.
On the earnings front, analysts are currently forecasting a 6.8% drop year-over-year for Q1 2023, which would be the largest quarterly decline since pandemic shutdowns ravaged the economy in 2020.
A few key trends worth monitoring include the impact of tighter lending conditions now (and in the future) on banks, whether large tech earnings underwhelm and put a dent in their market-powering rally this year, and to what extent inflation and rising interest rates continue to take a bite out of profits more broadly.
On the bright side, because general expectations for earnings are down in the dumps, even modest positive news embedded in reports could put more wind in the sails of 2023’s market turnaround.
About Prudent Management Associates:
Prudent’s core investment philosophy focuses on minimizing risk over time. As a result, the company does not react to market events, but rather considers them in a larger context to develop a long-term outlook for the development and maintenance of investment portfolios.
