This week investors are waiting for interest rate decisions and reports from major companies

January 30, 2023

At the close of the stock market on Friday, the Dow Jones Index (US30) increased by 0.08% (+1.61% for the week), and the S&P 500 (US500) added 0.25% (+2.32% for the week). The Technology Index NASDAQ (US100) gained 0.95% on Friday (+4.03% for the week).

The latest inflation data showed an improvement in the trajectory of core commodity prices and rate-sensitive components. The Fed’s favorite measure of Core PCE inflation fell from 4.7% to 4.4%, reinforcing the sense that interest rates are nearing a peak. Now the focus of policymakers has shifted to rebalancing the labor market and taking all measures to bring inflation to the target level. Will the Fed be able to do a “soft landing” of the economy, and what is the likelihood of the scenario? The data show an improving inflation picture, an orderly rebalancing of the labor market, and a relatively healthy consumer — all of these currently support the case for a “soft landing” more than a “hard landing.”

Many large companies report this week, so volatility in the stock market will increase substantially. Alphabet (GOOGL), Amazon.com Inc (AMZN), Apple Inc (AAPL), Exxon Mobil Corp (XOM), Caterpillar Inc (CAT), Advanced Micro Devices Inc (AMD), Meta Platforms Inc (META), Alibaba Group Holdings (BABA) are on the calendar.

Equity markets in Europe were mostly up on Friday. German DAX (DE30) gained 0.11% (+0.48% for the week), French CAC 40 (FR40) added 0.02% (+1.17% for the week), Spanish IBEX 35 (ES35) increased by 0.27% (+1.49% for the week), British FTSE 100 (UK100) gained 0.05% (-0.07% for the week).

The ECB will hold an important monetary policy meeting this week. The ECB is expected to raise the rate by 0.5%, and this scenario, according to economists, is already priced in. The rate is expected to peak in May 2023 at 3.25-3.5% (the current rate is 2.5%). Next, economists predict a pause until late 2023, when the deteriorating economy leads to a series of quarter-point cuts, which will begin in June 2024. Although the economy did better late last year, thanks to falling natural gas prices, government assistance to households and businesses, and easing supply disruptions, two-thirds of respondents still expect a shallow recession in the region.

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The Bank of England will also hold an interest rate meeting this week, where a 0.5% increase is expected. This will raise the cost of borrowing from 3.5% to 4.0%. The rate is expected to peak in March 2023 at 4.25%. The overall inflation rate should also begin to decline at a faster pace starting in March as the impact of last year’s steep rise in energy bills fades, and the pressure on commodities and food begins to ease more noticeably. A rate cut is expected in early 2024.

Last week, Chinese markets celebrated the Lunar New Year. Economists predict that this will give a boost to optimism about oil demand ahead of this week. Early data released from China showed an increase in tourism spending and box office receipts with outbound travel in the first six days of the Lunar New Year, up 120% compared to the same period last year. This will serve to bolster markets’ confidence in the world’s largest oil importers moving forward. Also, this week is the OPEC+ meeting. Delegates expect the advisory committee of ministers to recommend that production levels remain unchanged as global demand shows signs of potential recovery. Given current production and increasing Chinese demand, fundamentally, this could serve as the basis for further gains in oil prices.

Asian markets mostly rallied last week. Japan’s Nikkei 225 (JP225) gained 1.87% over the week, China’s FTSE China A50 (CHA50) did not trade all week due to Chinese New Year celebrations, Hong Kong’s Hang Seng (HK50) ended the week up by 5.46%, India’s NIFTY 50 (IND50) decreased by 2.67%, and Australia’s S&P/ASX 200 (AU200) ended the week up by 0.79%.

In the commodities market, lumber futures (+14.93%), coffee (+9.3%), sugar (+6.64%), and cocoa (+1.95%) showed the biggest gains last week. Natural gas futures (-10.11%), heating oil (-8.07%), palladium (-6.8%), WTI oil (-2.77%), platinum (-2.75%), and gasoline (-2.38%) showed the biggest drops.

According to strategists at Global Goldman Sachs, a key element of Japan’s ultra-easy monetary policy, known as yield curve control (YCC), has been the target of growing market skepticism in recent months, raising the possibility that the country may eventually abolish it entirely. The Bank of Japan originally introduced the YCC in September 2016 to prevent deflationary risks and to meet its 2% inflation target. But now, a number of factors, including the risk of inflation well above BOJ expectations, the prospect of higher wage growth, the deteriorating functioning of Japan’s government bond market, and the impending transition to a new BOJ governor, make a course change possible. The Bank of Japan may make further adjustments to the YCC as early as its next monetary policy meeting (MPM) in March.

According to Beijing University estimates, the number of Covid infections in China peaked in January. The subsequent higher level of immunity among the general population means that the secondary waves should have a smaller impact in terms of the number of severe cases. A recovery in Chinese consumption will be real but moderate. The housing market will face the prospect of a slower recovery than consumption or broad domestic demand.

S&P 500 (F) (US500) +4,070.56 +10.13 (+0.25%)

Dow Jones (US30) 33,978.08 +28.67 (+0.084%)

DAX (DE40) 15,150.03 +17.18 (+0.11%)

FTSE 100 (UK100) 7,765.15 +4.04 (+0.052%)

USD Index 101.92 +0.08 (+0.08%)

Important events for today:

– Switzerland KOF Leading Indicators (m/m) at 10:00 (GMT+2);
– Spanish Consumer Price Index (m/m) at 10:00 (GMT+2);
– Germany GDP (q/q) at 11:00 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

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This week investors are waiting for interest rate decisions and reports from major companies