RISING COSTS CAST SHADOW ON EARNINGS

 
David Morris
CFD MARKET STRATEGIST, GFT

AFTER months of pressure, Portugal finally gave in last week and approached the European Commission for financial aid. This caused widespread relief, as the EU has been desperate to create a firewall between Greece, Ireland and Portugal and the rest of the Eurozone. The consensus is that this latest bailout will insulate Spanish banks from further damaging losses which could impact on other European financial institutions. But to complicate matters, on Thursday the European Central Bank raised its minimum bid rate in response to rising prices and European core economic growth. The central bank’s move is being widely interpreted as the first step in a series of tightening measures – barring a fresh leg down in the ongoing financial crisis.

China also hiked rates, making the US dollar vulnerable as the Federal Reserve maintains its relaxed stance to rising prices. There are numerous FOMC members speaking this week, but the two who matter are the President of the New York Federal Reserve, William Dudley, and the Fed Chairman, Ben Bernanke. Both favour low rates and asset purchases, having recently insisted that surges in commodity and oil prices are temporary. Their stated concern is that unemployment remains too high for comfort, and that deflationary pressures could quickly re-emerge once food and fuel prices moderate.

With this in mind, there is a stack of important inflation data due out this week from the US, Europe, China and the UK. In addition, the US first quarter earnings season gets underway. There’s always a great deal of anticipation as a new season kicks off, although this quarter doesn’t really hit its stride until the three weeks beginning 18 April. This is when over 80 per cent of companies in the S&P 500 report. But as a warm-up, JPMorgan, Google and Bank of America all report this week. Revenue growth will continue to be as important as earnings, and expectations remain elevated. But analysts will be paying very close attention to forward guidance. Corporate executives have been dealing with higher oil and commodity prices since the Fed’s second round of quantitative easing was signalled at the end of August last year. Company chiefs could prove to be less sanguine than Ben Bernanke over the transitory nature of rising input costs, particularly as they put downward pressure on profit margins.