Investors on Guard as Stocks Rally Sputters Ahead of Data Deluge

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(Bloomberg) — It’s hard to blame any stock-market investor for being confused right now. 

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The S&P 500 and Nasdaq 100 indexes are both coming off their best weeks in a month. But the way Friday ended, it’s hard to feel optimistic. Where the market goes from here likely lies in a batch of economic data that will arrive over the next couple of days. 

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Traders are most closely watching the consumer price figures that are due Thursday because it will be key to determining if the Federal Reserve moves ahead with another 75 basis-point rate increase at its next meeting in early November. In fact, a further acceleration in prices could amp up the urgency to extend jumbo-sized rate hikes beyond this year.

“It’s a very bewildering time right now for investors, even more so than this whole year,” said Thomas Martin, senior portfolio manager at Globalt Investments. “Sentiment is the worst it’s ever been, so we were ripe for a pop. But we still have a very tight labor market and strong wage growth that’s complicating investors’ hopes for a Fed pivot. It’s a huge week with earnings season kicking off and the inflation data will be crucial once again.”

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Read: US Jobs Rise While Unemployment Drops, Keeping Pressure on Fed

CPI is forecast to have risen 8.1% in September from a year earlier versus 8.3% in August, according to economists surveyed by Bloomberg. Core CPI, which strips out volatile food and energy components, is projected to rise 6.5% on a year-over-year basis and fall to 0.4% month over month.

What’s more, the minutes of the latest Fed policy meeting arrive on Wednesday and may provide more insight into the central bank’s aggressive efforts to fight inflation. And there’s a key measure of US producer prices is due Wednesday, followed by the University of Michigan’s monthly consumer inflation expectations on Friday.

Flip Flop

It’s no secret that the market is highly sensitive to high inflation right now. Trading sessions this year when consumer inflation reports are released this have been rough, with the the S&P 500 falling seven of nine times. Many investors, have fresh memories of the last inflation print on Sept. 13, which came in hotter than expected, sending the S&P 500 down 4.3%. It was the worst CPI session since March 2020, and other than that the worst since 2011. 

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“This year, we’ve seen this absolute obsession around the inflation number,” said Matt Maley, Miller Tabak & Co.’s chief market strategist. “The bigger worry is — no matter the inflation report next week, investors are still going to be concerned about inflation being elevated. Most people on Wall Street are certain that we’re going to have a recession, and if the level of inflation stays steady, that won’t be good enough anymore.”

Tech Wreck

Semiconductor stocks, in particular, could face further pressure after taking a beating Friday after disappointing earnings results from Samsung Electronics Co. The world’s largest memory chipmaker reported its first profit drop since 2019, sparking further worries about Corporate America’s earnings power and margin-shredding inflation pressures.

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The Philadelphia Stock Exchange Semiconductor Index tumbled 6.1% after Samsung’s results and Advanced Micro Devices Inc.’s preliminary third-quarter sales missed projections by more than $1 billion. The index, which is home to chip giants like Nvidia Corp., Micron Technology Inc. and AMD, has plummeted 40% in 2022.

Flow Show

Investors are rushing out of US equities, and most other risk assets, in search of safety with a recession possibly looming. Stock funds have recorded sparse inflows this year as the bear market emerged. Since the start of 2022, US equities have posted inflows in 21 of 39 weeks, or 54%. That’s down from 58% of weeks in 2021, and 48% of weeks in 2020, according to Bloomberg Intelligence data.