Inflation falls, investors reduce risk. Central banks reduce liquidity, Q2 2023 earnings season begins.

Chart of the week

The chart shows the probability with which market participants expect an interest rate hike by the U.S. Federal Reserve. The next meeting of the US Federal Reserve is on July 26. Then they go on summer vacation and don't meet again until September 30.

Why this is important
Market participants expect a wide increase in interest rates by 0.25%. That should then be the last increase in the current cycle.

Interest rate hikes always have a lag effect on the economy of 6-12 months. The big question now is whether the Fed has raised interest rates too much and we are now sliding into a recession, or whether there is just a slowdown.

Inflation falls

The chart shows producer prices (darkbalu) in the U.S.A. and inflation (CPI) since 2011. Producers feel the inflation, but also cheaper prices first and pass it on to consumers at a second step.
The data therefore indicate that inflation should continue to fall sharply and will soon be within the central bank's target band of 2%.

In Germany, the largest economy in Europe, the picture looks even more positive. Producer prices (dark blue) have already fallen very sharply. It can therefore be assumed that inflation will also fall rapidly. Even faster than in the USA. This may mean that the European central bank will not have to raise interest rates massively.

Investors reduce risks
Due to the uncertainties of rising interest rates or a recession, many investors have reduced their risks.

The chart shows a calculation by S&P Global Market Intelligence. It is based on a survey of large institutional investors. They have consistently reduced risk since 2021 (left chart). They have done this by reducing equity investments and increasing the cash ratio and bonds. The right chart shows the return on the equity market. Comparing the two graphs, it seems clear that equity markets rarely rise when large institutional investors reduce risk. Further price reductions in the equity markets can be expected over the next 30 days as well.

Central Banks Reduce Liquidity

In previous blog articles, we have always pointed out the importance of the liquidity that central banks provide to the economy. During the COVID period, central banks provided massive amounts of liquidity to the markets to support the economy. Approximately one-third of this money flowed into the stock market. Then, starting in the fall of 2021, central banks began to reduce liquidity again. Again, it is expected that about one-third of the money will flow out of the stock market. The correction of the U.S. stock index S&P 500 was then not surprising.

The central banks had to interrupt the reduction of the money supply in the spring of 2023, because of the banking crisis. This now seems to have been overcome and they are reducing the money supply again. This does not seem to impress the stock market at the moment. It rises and rises. A discrepancy of falling liquidity and rising stock prices usually does not last long.

The chart comes from an analysis by Morgan Stanley. One of the most respected analysis houses in the US. They deduce falling markets for the next few weeks.
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Earnings season for Q2 2023 begins

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The macro trend of high inflation, rising interest rates and emerging recession has so far eluded many companies. Therefore, a special focus in the coming weeks will be on what profits the major companies in the U.S. will report for the 2nd quarter.

The chart shows market participants' expectations for corporate earnings in the US 39 weeks before month-end to 9 weeks after month-end. Just 39 weeks ago, analysts were expecting average earnings growth of 5% for Q2 2023, but they are currently assuming a reduction of 9%. It will now be seen in the coming weeks whether the analysts have reduced expectations too much and many companies can surprise positively.

The chart shows how much corporate profits in the USA have risen or fallen since 2022 and what analysts expect for the future. After a 9% slump in Q2 2023, things are then expected to pick up again sharply. These expectations for 2024 seem a bit too optimistic when looking at current interest rate forecasts. In any case, excitement is guaranteed on the markets for the next few weeks.

The chart shows when which companies will publish their earnings. The size of the bars shows the market capitalization of each company. Thus, the earnings results of Microsoft or Apple will have the greatest impact on the market. However, July 27, when Google and Meta will publish their results at the same time, are also significant.

Investors who are going on vacation should also definitely watch the markets from July 25 to 28. In addition to the interest rate decision of the U.S. Federal Reserve, most publications of quarterly results are also scheduled for the week.