The Week Ahead: Central Banks Meetings & Big Tech Earnings Eyed
- 📈 Wall Street closed sharply higher and benchmark Treasury yields hit pause on Friday following signals that the Federal Reserve might consider less aggressive inflation-curbing tactics after November. Stocks rallied after U.S. Treasury Secretary Janet Yellen said inflation is not becoming embedded in the economy, and San Francisco Federal Reserve President Mary Daly said it is time for the Fed to consider slowing the pace of its interest rate hikes. The major market indexes all scored their biggest weekly percentage gains since June, with the S&P 500 finishing up 4.7% for the week, The Dow Jones rising 4.9%, and the Nasdaq Composite popping 5.2%.
- 🔀 Shares of Snap plunged on Friday after a disappointing quarterly report. Additionally, Verizon Communications Inc shares fell around 6% after it reported a 23% decrease in profits and a loss of 189,000 monthly bill-paying phone subscribers in its consumer business in the third quarter. But more than 70% of S&P 500 companies so far have reported a “positive” surprise in terms of earnings per share. Great numbers from Netflix sent the stock up 13% after the bell on Tuesday as investors applauded the streamer’s return to growth. The company added 2.41M customers in the third quarter, expanding in every region and topping Wall Street’s expectations.
- 😕 Last week’s data show that while the U.S. economy has remained resilient thus far, tighter monetary policy is certainly starting to impact some key sectors. Industrial production regained its footing in September, but there are signs of slower growth ahead, while regional manufacturing surveys support this loss of momentum. The Empire State and Philadelphia Fed surveys continued to signal contraction in early October as both headline indices remained in negative territory. Meanwhile, the real estate sector has been significantly affected by rising interest rates with total housing starts falling 8.1% in September.
- 🤯 Prime Minister Liz Truss and her government collapsed Thursday with her sudden resignation announcement after six turbulent weeks in office, making her the shortest-serving prime minister in British history. Truss was elected in September and had promised tax cuts funded by borrowing, deregulation, and a sharp shift to the right on cultural and social issues. But within weeks she was forced to sack her finance minister and closest political ally, Kwasi Kwarteng, and abandon almost all her economic program after their plans for vast unfunded tax cuts crashed the pound and sent British borrowing costs and mortgage rates soaring.
- 📊 Hotter-than-expected CPI readings out of New Zealand, Canada and the United Kingdom have reinforced the view that the fight against inflation will take a lot longer than anyone anticipated. In the U.K., September CPI inflation ticked back into double-digit territory, rising by 10.1% year-over-year. In Canada, September CPI inflation eased, albeit by far less than expected to 6.9% year-over-year, from 7.0% in August. In New Zealand, the Q3 CPI slowed much less than expected, easing to 7.2% year-over-year, from 7.3% in Q2.
- 😢 In Australia, the September labor market report hinted at some loss of momentum. For the month, Australian employment grew by just 900 people, well below the 25,000 forecast by the consensus. Full-time employment rose by 13,300, although that was largely offset by a 12,400 decline in part-time employment. Aggregate hours worked was also flat on the month, although the unemployment rate was unchanged at a still-low 3.5%.
Central Banks Meetings
ECB ready to act big
With inflation running around 10%, the European Central Bank is widely expected to roll out another ‘turbo’ rate increase on Thursday. Markets have priced in a three-quarter-point boost to rates after a swathe of ECB officials put their weight behind such a move. Since that’s already baked into the cake, the market reaction will come from President Lagarde’s commentary.
Lagarde and her lieutenants might be inclined to strike a hawkish tone and attempt to defend the devastated euro. Since the Eurozone imports most of its energy, a falling euro makes power prices even more expensive, amplifying inflationary forces and crippling economic growth. Further currency depreciation is the last thing Europe needs.
There are two ways the ECB can ‘talk up’ the euro – either by signaling that interest rates could peak at a level higher than the 3% markets currently envision, or through the balance sheet by opening the door for quantitative tightening. The balance sheet route is unlikely after the UK bond market fiasco, and also considering the debt burden Italy faces. This leaves the terminal rate as the most realistic channel. This means there’s scope for a relief rally in the euro. However, it is still too early to envision a trend reversal though, as that would require a pivot from the Fed that weakens the dollar, which doesn’t seem imminent.
On the data front, the ball will get rolling on Monday with the preliminary PMI business surveys for October, which will reveal how close the economy is to recession and how inflationary pressures are evolving. Then on Friday, Germany’s preliminary GDP growth estimate for the third quarter and inflation stats for October will hit the markets.
BoJ to stand pat
Over in Japan, the central bank’s refusal to even consider higher interest rates has annihilated the yen, which has lost an incredible 30% of its value against the US dollar this year.
Heading into the Bank of Japan’s decision on Friday, the question is whether anything has changed to elicit a policy shift. The answer is probably not. Inflation has fired up and is running at 3%, but wage growth and inflation expectations are still muted, reinforcing the BoJ’s thinking that the current inflation wave is driven by supply factors that will fade away soon. Funds are still betting that the BoJ will be forced to relax the ceiling it has imposed on Japanese yields, but the timing is highly uncertain. An acceleration in wage growth would be the signal such a move is coming. Without that, there’s a real chance nothing changes until April, when Governor Kuroda’s term expires.
As for the yen, the outlook remains gloomy. As long as the underlying force of interest rates is working against the currency, any rallies will likely remain shallow and any episodes of FX intervention, like Friday’s one, might simply delay the inevitable. A trend reversal would require a change of heart from the BoJ or Fed, or both.
BoC – double or triple?
Crossing into Canada, a rate increase is almost certain when the central bank concludes its meeting on Wednesday. The question is how large the move will be, with investors split between half or three quarters of a percentage point.
There are solid arguments on both sides. Inflation is still hot and the labor market is in solid shape, which suggests the Bank can keep pushing. However, house prices have started to decline and the latest business survey from the central bank itself showed that most Canadian companies already expect a recession. With oil prices also marching lower, the more prudent option seems to be a smaller, half-point rate increase. Pushing this ‘bubbly’ housing market too hard could spell disaster, so the BoC has an incentive to tread lightly. In this case, the initial reaction in the loonie would likely be lower.
U.S. Earnings & U.K. Turmoil
Big tech earnings eyed
Earnings reports from the four biggest U.S. companies by market capitalization in the coming week may test a nascent rally that has seen stocks claw their way back from yet another low.
Apple, Microsoft, Google-parent Alphabet and Amazon account for a combined 20% of the weight of the S&P 500 and more than a third of the Nasdaq Composite. Microsoft and Alphabet are due to report on Tuesday, with Amazon and Apple set for Thursday.
Investors view the growth giants as bellwethers for how corporate America is faring during a year in which inflation has soared, pushing the Federal Reserve to quickly enact a series of jumbo-sized rate hikes that bruised markets and raised fears a recession may be coming. If these megacaps can’t do well, then the question is: who can do well?
Resilient corporate profits have been one bright spot this year, though doubts are growing over how sustainable they will be. With the bulk of S&P 500 companies still to report, third-quarter profits are estimated to have climbed 3.1% versus the year-ago period, which would be the weakest performance in two years, while earnings growth expectations for 2023 have fallen to 7.2% from 7.8% on Oct 1.
This week’s reports from the four megacaps may show whether companies with dominant positions can post solid performance despite worries of a potential economic downturn. Because of their heavy weightings, “if those stocks don’t get it done, that puts pressure on the indices to continue to go down.
The UK’s next PM is…
A new week will bring a new Prime Minister in the UK, the third in two months, following the resignation of Liz Truss. Candidates will need 100 nominations by Monday to be considered for the Prime Minister position. There are 357 Conservative MPs. Therefore, the maximum number of candidates can only be 3. The candidates with the best odds include ex-PM Boris Johnson, ex-Chancellor Sunak and Leader of the House of Commons, Penny Mordaunt. If only 1 candidate receives 100 nominations by Monday, the UK will have its next PM. In theory, we could have a winner by Monday but if it goes to the membership, it will be Friday.
American, British, and Australian data
In the United States, there’s a flurry of crucial data releases coming up, starting with the S&P Global business surveys on Monday. But the main event will be on Thursday, when the preliminary estimate of GDP for the third quarter is published.
The Atlanta Fed GDPNow model points to growth of almost 3%. Coupled with sizzling inflation and a labor market that’s still firing on all cylinders, such a GDP print could cement expectations that the Fed will push rates all the way to 5% or beyond. The week will culminate with the core PCE price index on Friday.
In the UK, politics will remain front and center waiting for the PM picture to unfold, but on the data front, the PMIs for October due out on Monday will attract attention.
Finally in Australia, the inflation report for Q3 will hit the markets early on Wednesday.
Dow +4.9% to 31,083. S&P 500 +4.7% to 3,753. Nasdaq +5.2% to 10,860. Russell 2000 +3.6% to 1,742. CBOE Volatility Index -7.3% to 29.69.
S&P 500 Sectors
Consumer Staples +2.2%. Utilities +2.0%. Financials +3.9%. Telecom +5.0%. Healthcare +2.3%. Industrials +4.7%. Information Technology +6.5%. Materials +6.2%. Energy +8.1%. Consumer Discretionary +5.6%.
London +1.6% to 6,970. France +1.7% to 6,035. Germany +2.4% to 12,731. Japan -0.7% to 26,891. China -1.1% to 3,039. Hong Kong -2.3% to 16,211. India +2.4% to 59,307.
Commodities and Bonds
Crude Oil WTI -0.8% to $84.0/bbl. Gold +0.8% to $1,662.5/oz. Natural Gas -22.6% to 4.992. Ten-Year Bond Yield -0.2 bps to 4.219.
The U.S. dollar tumbled against the yen on Friday, logging its biggest daily drop against the Japanese currency in more than two months as Japan intervened in the foreign exchange market to buy yen for the second time in a month after the currency hit a 32-year low near 152 to the dollar, as stated by a government official. Japan has been attempting to shore up the battered currency as the central bank sticks with ultra-low interest rates, countering a global trend of tightening monetary policy and widening the gap between U.S. and Japanese interest rates. After the dollar rose to 151.94 yen, its highest since 1990, the intervention drove the Japanese currency down more than 7 yen to a low of 144.50 yen, before paring gains to trade up about 1.4% at 148.195. The dollar index, which measures the greenback’s strength against a basket of currencies, was 0.7 % lower at 112.17, down from a three-week high of 113.95, hit during the session. The weakness in the dollar helped lift sterling 0.2% to $1.1261. The pound ended the week with remarkable gains after having leapt as much as 1% the previous day after Truss announced her departure.
EUR/USD + 1.47%. USD/JPY -0.73%. GBP/USD +1.24%.