Stocks bounced back this past week, marking a strong start to the second half of 2022 (which we think will be a good one, as sent out earlier this week). We’ll take any gains we get, but in no way this week put much of a dent in this current bear market. 

For the week, the U.S. dollar index rose to around 107. Gold dropped below $1,800 per ounce. Commodities have been volatile, including American oil benchmark West Texas Intermediate crude, which ended Friday around $105 per barrel. The yield on the 10-year Treasury, which meaningfully pulled back to under 3% and near its lowest levels since May last week, rose back above 3% on Friday after the strong jobs report indicated the Fed might need get more aggressive to cool down the economy

The S&P 500 on Friday just missed closing higher for its fifth straight session, which would have been its longest winning streak since an eight-day upswing back in November 2021. Friday’s slight miss came on the heels of a stronger-than-expected June employment report. The jobs data raised market expectations for a Federal Reserve interest rate hike at the higher end of the 50- or 75-basis-point range at the upcoming July FOMC meeting.

The Fed’s minutes from June’s FOMC meeting, which were out this past Wednesday, said that they “recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist." It was interesting to see the market shrugged off this clearly hawkish tone. This suggests to us the market has priced in that the Fed will do whatever it takes to fight inflation. Furthermore, we think the market has priced in the Fed might create a recession to bring down inflation.

We believe enough time, price action and data have come for us to say that the market is done with inflation. That is, the market believes inflation will return to 2% (Fed's target) at some point in the next 2 years. We have seen commodity prices dropped like a rock. We have heard that the Fed will do whatever it takes to bring down inflation. Practically, the market needs confirmation of a lower inflation read in order to make a substantial move to the upside. However, if we don't get one now, likely it won't be a big deal, again because market believes inflation will come down eventually.

So what does the market focus on now? It's the by-product of inflation coming down, which is a potential recession. You see, higher inflation is a by-product of strong economic activities. The converse must be true, that when inflation cools down, it has to be because the economy is cooling down as well (not as strong). A recession is not news to anyone anymore, in fact, we may be in a technical recession, if this quarter GDP prints a negative read (in addition to first quarter's negative read). What's important is the magnitude of this recession, and ultimately, how much do companies' earnings decline. This was a big theme that we discussed in our note earlier this week about our outlook for a stronger 2H 2022, because we believe the market has largely priced in a bad recession and substantial declines in earnings. 

The latest earnings season on Wall Street begins in earnest this coming Thursday, with our holding Morgan Stanley (MS) out with quarterly numbers before the opening bell, Wells Fargo (WFC) before the bell on Friday. The week ahead also brings two key inflation reports as well as several other earnings reports from major companies. Here’s a rundown.

Monday, July 11

• After the bell: PepsiCo (PEP), PriceSmart (PSMT)

Wednesday, July 13

• Before the bell: Delta Air Lines (DAL), Fastenal (FAST)

• 8:30 a.m. ET: Consumer price index (June)

• 2 p.m. ET: Treasury’s latest budget statement

• 2 p.m. ET: Fed’s Beige Book report on regional economic activity

Thursday, July 14

• Before the bell: JPMorgan (JPM), Taiwan Semiconductor (TSM), Ericsson (ERIC), Conagra (CAG), Cintas (CTAS), First Republic Bank (FRC)

• 8:30 a.m. ET: Producer price index (June)

• 8:30 a.m. ET: Initial jobless claims (week ended July 9)

Friday, July 15

• Before the bell: UnitedHealth (UNH), Citigroup (C), Progressive (PGR), US Bancorp (USB), PNC (PNC), BlackRock (BLK), BNY Mellon (BK), State Street (STT)

• 8:30 a.m. ET:  Retail sales (June)

• 9:15 a.m. ET: Industrial product and capacity utilization (June)

• 10 a.m. ET: Michigan consumer sentiment survey (preliminary July)