Wed. May 18th, 2022

Will the Federal Reserve indicate an interest rate hike in March?

After another month of hot inflation data, the US Federal Reserve is expected to discuss the various instruments in its arsenal at its two-day policy meeting next week to curb price pressures and pave the way for an interest rate hike in March.

Since the release of its December 2021 meeting minutes earlier in January, investors and analysts have expected more hawkish action from the central bank. Those minutes showed officials weighing the prospects of raising interest rates “sooner or faster” than they initially expected.

Futures markets have since fully priced in a quarter-point increase at the March meeting, with a further three increases priced in for 2022.

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On his December meeting, the Fed has decided to accelerate the pace at which it is declining its purchases of US government bonds and mortgage-backed securities. To run that program faster gives the Fed more time to raise interest rates: the accelerated schedule now puts the taps on course to end mid-March.

Some analysts, such as Andy Brenner, head of international fixed income at NatAlliance Securities, have suggested that the Fed could further accelerate its downturn next week to give itself more flexibility around a March hike. Brenner also said the Fed is likely to start discussing a reduction in the size of its $ 9tn balance sheet, another topic raised in December. Kate Duguid

Will the next crop of US earnings disappoint?

The US earnings season is now well underway and some of the biggest companies’ results so far have been poor.

Record full-year earnings for Wall Street bank JPMorgan tempered by a warning that higher costs would bite into profits. Days later, Goldman Sachs pointed to a big jump in spending for the fourth quarter.

Meanwhile, projections of significantly slower growth in subscriber numbers are being sent Netflix shares tumble – a decline that has penetrated more into the stock markets as concerns about earnings put new pressure on speculative technology stocks that have already sold dramatically at a volatile start to the year.

The challenges posed by those big companies have brought next week’s harvest of results into sharper focus. Financial power stations Blackstone, Mastercard and American Express are next on the earnings list, as well as “Big Tech” behemoths Microsoft, Apple and Elon Musk’s carmaker Tesla – which report on Tuesday, Thursday and Wednesday respectively.

Microsoft is expected to deliver $ 2.30 earnings per share for the December quarter, from $ 2.03 in the same period in 2020, on sales of $ 50.6 billion, according to FactSet data. Apple’s quarterly EPS is expected to end at $ 1.89, from $ 1.68 on sales of $ 119 billion.

In general, components of the S&P 500 blue chip stock meter are forecast to achieve year-on-year earnings growth of around 23 percent for the fourth quarter. But just over a tenth of the index’s companies reported by the end of last week, leaving room for downward revisions.

Analysts are likely to focus on how companies manage cost pressures against a backdrop of persistently high levels of global inflation. They will also question how far the looming outlook of interest rate hikes – implemented to curb rising price growth – will help or hamper performance.

JPMorgan’s chief financial officer said in an earnings call that the bank should benefit from rising borrowing costs and greater demand for loans. But higher rates also erode the present value of future cash flows for high-value technology companies, potentially making them less attractive than investments. Harriet Clarfelt

How much did Omicron weaken European business activity in January?

The Omicron coronavirus variant is expected to weigh on European economic activity in January, expected to show accurate indicators of business sentiment published on Monday.

Economists polled by Reuters expect IHS Markit’s composite purchasing managers’ index of the eurozone, which tracks private manufacturing and services activities, to weaken to a one-year low of 52.6 – offset by the hard-hit German services sector.

Activity in France is expected to show more resilience, with PMI readings well above those in the eurozone’s largest economy.

“With Omicron hitting some eurozone countries, particularly Germany, only full this month, the likelihood of a further decline in the index seems high,” said Sandec Horsfield, an economist at Investec. However, she acknowledged that restrictions on activity in general have not been as sharpened as earlier in the pandemic, indicating a more moderate rate of cooling than in previous waves.

Line Manager of Purchasing Managers' Index, Under 50 = a majority of businesses reporting a contraction showing that Omicron will weigh on European activity

In the UK, the composite PMI index is expected to have risen to 55 from a 10-month low of 53.6 in December, reflecting an earlier spread of the latest wave. “We expect the January report to show a relief in Omicron fears as daily infection rates slow down and stricter social restrictions become less likely,” Horsfield said.

The key figures for both the eurozone and the UK are expected to be above the 50 mark, indicating that a majority of firms are reporting an expansion, with stronger readings for manufacturing than for services.

While factories’ production across Europe is expected to be curtailed by component shortages, “there are preliminary signs that supply constraints that held back production last year are beginning to ease,” Horsfield said. Valentina Romei

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