Inflation – Main Theme On Wall Street. What Does It Mean For Stock Market Traders?

S&P 500 and Nasdaq traded to new record highs in spite of disappointing GDP growth in the third quarter which came in at +2%, slightly below analyst expectations of +2.6%, and quite a bit below Q2 growth of +6.7%.

Most notably, personal spending decelerated sharply to +1.6% from +12% in Q2, while retail sales actually declined slightly after a more than +8% increase the previous quarter.

Supply Chain Dislocations

The slowdown is largely blamed on widespread shortages of consumer goods resulting from the ongoing supply chain dislocations. Bulls are quick to point out that while the Q3 GDP level of +2% may be disappointing, it is still +1.4% higher than before the pandemic. Moreover, bulls expect that building pent up consumer demand will translate to stronger growth in Q4 and Q1. In fact, the National Retail Federation (NRF) last week predicted sales will rise as much as +10.5% to $859 billion this holiday shopping season (Nov. 1-Dec. 31), beating last year’s record as shoppers return to malls and stores.

Inflation – Main Theme For Central Banks

Inflation has been a main theme for central banks last week with Bank of Canada and the European Central Bank both taking more hawkish turns. Bank of Canada is the most aggressive, announcing on Wednesday an abrupt halt to its asset purchase program and pulling forward its rate hike timeline. The central bank’s statement cited higher energy prices and pandemic-related supply bottlenecks that “now appear to be stronger and more persistent than expected.”

The ECB opted to slightly reduce its monthly bond buying pace as it forecast inflation rising further in the near term but then declining next year. The ECB did push back against the possibility for rate hikes in 2022, though, as it expects inflation will fall below the ECB’s +2% target rate by the end of 2022 without any intervention.

The two countries face a similar dilemma as the U.S. with signs of slowing growth amid surging inflation that is mostly a result of pandemic-induced supply chain dislocations.

The U.S. Federal Reserve meets this week on November 2-3. Wall Street largely expects the Fed to announce a reduction in its monthly asset purchases beginning in December. The big question is how big the reduction will be as investors will use that to gauge when interest rate hikes might begin. Most on Wall Street believe the Fed will hold off on rate increases until after its asset purchase “taper” is complete.

Data To Watch

This week also brings the October Employment Report, which is expected to show an increase in hiring over September based on the steady decline in weekly jobless claims this month.

Other key data includes ISM Manufacturing and Construction Spending on Monday; ISM Non-Manufacturing and Factory Orders on Wednesday; and Consumer Credit on Friday.

On the earnings front, Apple and Amazon both released disappointing results last week. Apple slightly beat earnings expectations but fell short on revenue. The company estimates that ongoing supply constraints, particularly the chip shortage, had a -$6 billion negative impact on revenue.

Amazon missed on earnings and revenue while also delivering a lower-than-expected guidance for Q4 due to labor and supply chain issues that the company anticipates will add up to “billions” in additional costs.

SP500 Analysis

As it was expected SP500 reached Gann resistance at 4600. Cycles and seasonal is still bullish for the 2 months. However, Advanced Decline Line is forming bearish diverge. On the other hand, the professional accumulation is very strong. With that in mind coming few sessions are very important. If price build the base above 4600, we can see 4800 till the end of this year. A rejection from Gann resistance can bring a pullback. The fundamentals still support bullish trend, despite rising inflation and declining household income. Thus, SP500 is “buy the dip” market.

There are few important support levels to watch – 4500, 4250 and 4125. If key economic indicators remain near current levels, pullbacks will be bought again by investors. Shorting is only possible if fundamentals change and price builds resistance below daily MA50.