A look at the day ahead in markets from Amanda Cooper, Europe
breaking news editor.
This week promises to be one of the most action-packed in a
while. Three of the world's most influential central banks are
likely to raise rates to their highest since the financial
crisis, while Q4 earnings season is starting to gather pace.
Big Tech royalty in the form of Apple , Alphabet and Amazon deliver earnings. With the tech
sector bleeding profitability and jobs, whatever these three say
on that front could carry almost as much weight as whatever the
Federal Reserve says when it pronounces on the economic outlook
on Wednesday.
With 109 of the S&P's 500 components set to report in
the coming five days alone, investors are going to get a
non-stop barrage of hot takes on anything from inflation to the
impact of the gyrations of the dollar, to China and beyond.
The euphoria that marked the end of 2022, fed by China
dismantling its COVID restrictions and more benign energy
prices, has carried through this month, despite a decidedly
gloomy earnings season and an insistence among central bankers
that high inflation isn't going anywhere any time soon.
The S&P itself is heading for a 6.1% rise this month - which
would mark its best January since 2019. The first month of the
year tends to be one of the strongest anyway, according to
Refinitiv data.
In the last 94 years, the S&P has risen by 1.2% on average
in January, compared with an average rise of 1.3% in December,
the month with the highest returns.
One of the major boosts that the stock market has enjoyed
this January has been the seemingly cast-iron conviction among
traders and investors that the Fed, while not bluffing exactly,
won't raise rates as much as policymakers say they will, and
that inflation won't prove nearly as sticky.
This has translated into a near 30 basis-point drop in
10-year Treasury yields and the S&P hasn't got as much bang for
its buck in the month of January from a drop in yields like this
in recent memory.
Even in strong Januarys, such as that of 2019, when the
index rose by 7%, 10-year yields fell only 6 bps. In January
1987, when the index rose 13%, yields fell just 6 bps.
With so much riding on the Fed being wrong and the markets
being right about the outlook for monetary policy, there would
appear to be a lot more scope than usual for equity bulls to get
a smack in the face from anything that might force a rethink on
where U.S. rates might peak.
Key developments that should provide more direction to
markets on Monday:
- Dallas Fed Manufacturing Business Index January -18.8
prior
- Dallas Fed PCE 3.4% prior
- German economy unexpectedly shrinks in Q4
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(Reporting by Amanda Cooper; Editing by Hugh Lawson)
