UK banks and US tech stocks lead a bumper week for corporate earnings in the week ahead. Lloyds Banking Group’s results will be among the most closely watched – as the UK’s biggest mortgage lender, it is widely regarded as a bellwether for the British economy. Across the pond, the so-called “MAMAA” stocks – that’s Microsoft, Apple, Facebook owner Meta, Amazon, and Google owner Alphabet – are all due to report their latest numbers. Meanwhile, central banks in the eurozone, Canada and Japan are set to make key interest rate decisions as they seek to tame rising prices.
OUR TOP FIVE EVENTS FOR 24-28 OCTOBER:
Wednesday 26 October
Bank of Canada interest rate decision
Are we near to peak rate hikes for the Bank of Canada. It seems unlikely given the direction of travel from the Federal Reserve. We saw the Bank of Canada raise rates by another 75bps, following on from the 100bps seen in July. There is already increasing evidence that wages are starting to rise in response to this recent inflation surge, however headline CPI does appear to be showing signs of slowing with headline CPI falling to 7% in August, from the June peaks of 8.1%. This suggests we could well see 50bps at this week’s meeting rather than the customary bumper hikes we’ve become used to. The increased focus on core prices appears to be driving the dynamics here and while lower they are much stickier at around 5.7%.
Thursday 27th October – European Central Bank interest rate decision
At its last meeting in September, the European Central Bank raised interest rates by 75 basis points (bps) after banks upgraded their eurozone inflation forecasts to 8.1% in 2022 and 5.5% in 2023. These targets already look dated, now that German inflation is well above 10% and the EU headline rate is also in double figures. A growing number of ECB policymakers support higher rates, despite an acknowledgment that GDP is likely to fall. The euro area’s central bank has cut its 2023 and 2024 GDP growth forecasts to 0.9% and 1.9%, respectively, marking a slowdown from the 2022 forecast of 3.1%. But even these forecasts seem optimistic given the steep rise in energy prices.
The ECB expects to continue raising rates in upcoming meetings, albeit probably at a slower pace than the Federal Reserve. Mind you, a number of ECB governing council members have discussed the need to front-load rate hikes to swiftly get headline interest rates up to 3%. This would be a huge jump from current interest rates of 1.25%. If the ECB raises rates by another 75 bps this week, the effect on indebted member states like Italy could be problematic. Although the ECB has introduced its transmission protection instrument (TPI), a programme that aims to ensure that the ECB’s monetary policy stance is transmitted smoothly across all eurozone countries, questions remain as to how it might work. There is also the added problem that aggressive tightening is precisely the wrong medicine at a time when demand is cratering and the bloc’s largest member economy, Germany, is likely to tip into recession by the end of the year.
US Q3 GDP
The US economy contracted 1.6% on an annual basis in Q1 and shrank a further 0.6% in Q2. Two consecutive quarters of declining GDP put the US in a technical recession, so it seems somewhat counterintuitive that economists expect Q3 to deliver a rebound of 2.2%. Growth is thought to have mainly been driven by firms rebuilding their inventories. US markets generally interpret an uptick in GDP as a positive development for the dollar. After Thursday’s initial estimate, two further readings will follow in the coming weeks, though these later prints are unlikely to be market-moving.
Friday 28 October
Bank of Japan interest rate decision
With the Japanese yen set to fall to 32-year lows against the US dollar the focus remains firmly on the Bank of Japan and its apparent unwillingness to alter course on its own monetary policy settings. We’ve already seen the first round of intervention which saw the yen initially strengthen, however until such time as we see some sort of pivot from the Japanese central bank then further weakness towards 150 and 160 looks increasingly likely. The Bank of Japan’s CPI forecast is expected to be pushed up from its current 2.3%, especially given that we’re already at 3%, and an 8 year high, and there is little sign that price pressures are diminishing.
US PCE price index (September)
The closely watched core personal consumption expenditures (PCE) price index, which excludes volatile food and energy prices and is said to shape the US Federal Reserve’s monetary policy, increased 4.9% in the year to August, up from 4.7% in July. Core inflation has become stickier as higher prices for services and wage growth become embedded.
Core PCE is expected to jump to 5.2% in September, increasing the likelihood that the Fed will raise interest rates by another 75 bps at their upcoming meetings in November and December.
Overall a busy week ahead on the Marco and earnings front. We don’t usually cover single stocks in this newsletter however this weeks earnings realises from Apple (AAPL.O), Microsoft (MSFT.O), Google-parent Alphabet (GOOGL.O) and Amazon (AMZN.O) account for a combined 20% of the weight of the S&P 500 (.SPX) and more than a third of the Nasdaq Composite (.IXIC).
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.
The S&P 500 is up nearly 5% from its Oct 12 closing low for the year after posting its biggest weekly gain since late June. Even with stocks' latest rebound, the index has dropped 21% so far in 2022, on track for its biggest decline since 2008.
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.
Should these mega caps beat earnings expectations this week, market participants could be looking for a potential low print to be in place for US equity indices.
