Earnings face the inflation test

A look at the day ahead from Danilo Masoni.

After weeks of debate about the supposedly transitory nature of higher inflation and its potential monetary policy implications, markets are about to find out how rising input costs impacted companies during the third 2021 quarter.

As the reporting season kicks off in earnest from this week, commodity price rises, labour shortages and supply bottlenecks will be the main story, taking over from the absolute recovery narrative of the previous two quarters. But with world stocks down as much as 6% from last month’s record highs, it’s anyone’s guess whether the margin squeeze is already priced in.

Asia started Monday on the upside but European and U.S. equity futures suggest some caution, possibly as oil prices extended their multi-week gains, pushing Brent crude to new three-year highs.

Still, investors may be coming to terms with a more moderate economic growth pace. Nineteen S&P 500 firms report earnings this week starting with the big banks; Refinitiv IBES forecasts profit growth at 30% this quarter, down from 96% in the previous three-month period.

Companies may also find it harder in future to engage in tax arbitrage — a common practice in particular among tech and pharma firms — after 136 nations agreed on Friday to implement a 15% minimum tax rate on big firms.

Meanwhile, hawkish central bank noise continues. Bank of England policymaker Michael Saunders told households to get ready for “significantly earlier” interest rate rises. He spoke shortly after BoE Governor Andrew Bailey said above-target inflation was concerning and had to be managed.

A Polish rate setter too said last week’s surprise rate hike was the beginning of normalising monetary policy.

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