One of the biggest macro concerns for investors right now is earnings. On Thursday we have earnings for both Apple and Amazon and we need to bear in mind a few things about why earnings matter. Firstly, this is all about growth. The Fed is expected to hike rates by 50 bps next week and Short Term Interest Rate markets are expecting the Fed to hike up to 9 times this year. So, the Fed is at the start of a hiking cycle and that is why earnings are very important.
What higher interest rates mean
The reason that the US is hiking interest rates is to deal with high inflation. The only real tool a central bank has to dealing with high inflation is to increase interest rates. So, they just simply hike rates right? Yes, but there is a problem. When a central bank hikes interest rates financial conditions become more challenging. Mortgage rates rise, loan re-payments increase, and there is less disposable income around. This means companies can become less profitable. If these tough conditions remain then jobs are laid off, homes are forfeited, and economies go into recessions. So, if the Fed hikes too soon, too fast they risk slowing growth and causing a recession.
So now you see the problem
If the Fed don’t hike inflation could get out of control. If the Fed hike too far, too fast they risk bringing the US into a recession. So, this is why some say the Fed are ‘trapped’. They are damned if they do hike and damned if they don’t.
How earnings fit into this
Earnings from US companies indicate how the US economy is faring. Ideally the Fed wants to be able to hike without slowing growth. This means that strong earnings will reassure investors that the coming rate hikes can be absorbed by the US economy. The Fed’s perspective is that the US economy can cope with the rate hikes, so they have a green light to deal with inflation.
What’s the trade?
Well, if earnings disappoint then that would open up a stagflationary environment where growth is low, but inflation is high. That tends to be positive for inflation hedges like gold and the CHF. If earnings meet/ exceed expectations then stocks could find buyers from key support. However, earnings is not the only risk to worry about. There are also major risks from the Russia/Ukraine conflict and COVID-19 lockdowns in China. Both events can alter the risk tone in their own right and risks need to be balanced against one another. Key support is provided by the 100 and 200 EMA on the daily chart for gold as marked below.
