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Macy’s Rise Suggests Investors Are Delirious

Macy’s share price rose 5% even though the company said in its earnings that inflation and a sluggish consumer will make for a more difficult year, suggesting investors are wrong.

They still believe the Federal Reserve will cut interest rates because they are more afraid of causing a recession than they are of 8.5% inflation and up to 5% unemployment. (It’s now around 3.5%.)

Either commodity inflation stays high and the Fed leaves it alone, or consumers pull back spending and the economy slows anyway.

“I think traders are starting to believe that inflation isn’t going to go away by flipping a switch,” said Naeem Aslam, chief market analyst at Ava Trade in London. “It’s a process and a very painful process. Inflation is likely to continue for a long time.”

Dick’s sporting goods hit the road: don’t get too excited.

Dick’s Sporting Goods had a good day on Tuesday, beating Wall Street’s earnings estimates. The stock was up 2% late this morning. And contrary to what Macy’s says, it’s even raising its guidance for the year.

Dick’s is trading in great heat right now. This thing can only go down.

Last Tuesday marked the S&P 500’s 17% rally from its June low. Everything was fueled by speculation that the Fed would halt raising rates (making capital more expensive – including the margin debt accounts that Wall Street likes to play with) and stronger than expected payrolls in July.

Other data including solid retail sales and industrial production for July should remind everyone that the US economy is still in a low interest rate environment. People and businesses took on debt before borrowing became more expensive.

The quarterly report on household debt and creditworthiness for the first quarter of 2022 shows an increase in total household debt of US$266 billion to US$15.84 trillion. Balances are now $1.7 trillion higher than they were at the end of 2019 before the COVID-19 pandemic, based on data from the New York Federal Reserve Bank.

Month-on-month real wage growth was positive in July and is expected to turn positive again in August, supporting consumption.

While that’s one of the reasons companies like Dick’s Sporting Goods have beaten expectations, investors may be outdated. So is the consumer keen to get back to normal after nagging lockdowns and restrictive Covid guidelines.

“We expect equity markets to remain volatile as investor sentiment vacillates between hope that the Fed will succeed in guiding the US economy to a soft landing and fear that it will fail.” , says Mark Haefele, CIO of UBS Global Wealth Management. Against this uncertain backdrop, UBS recommends clients to remain selective when buying shares. They recommend investors avoid chasing the markets and instead stick to value stocks (which Macy’s may have been one of) and longer-term energy trends.

In energy, coal and natural gas prices continue to rise despite the oil decline.

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Energy costs in Europe are clearly on an upward trend, a headwind for producers of all types, whether agricultural or manufacturing. Any office with a light switch has problems there.

Energy prices will drive inflation in the EU, the second largest economic zone after the US If so, says Ava Trade’s Aslam, “it would be foolish to think that inflation has peaked. In fact, we may see another higher reading of inflation soon.”

The European STOXX 50 could be penalized even more severely by traders. And the S&P 500 is likely to trade somewhat sideways after losing momentum last week.

Meanwhile, natural gas prices, the commodities that power the world, hit $10 for the first time since 2008, as oil prices neared $200 a barrel and the Great Recession was imminent. Much of the commodity movement is a speculative bet on the Russia-Ukraine war and Europe’s response to it, but traders seem to think price trends are higher due to supply issues.

Inflation and high fuel costs in the second largest economy in the world can easily turn this market upside down.

Late last week, Richmond Fed President Thomas Barkin warned that inflation must be contained even if it leads to a recession. The US is already in a technical recession, defined as two consecutive quarters of economic contraction.

Attention is focused on the Jackson Hole symposium, which begins Thursday. Markets will listen to Fed Chair Jerome Powell’s speech for further clues on inflation and commodity prices.

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