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Saxo Spotlight: What’s on investors' & traders' radars this week? Fed/ECB/BOE meetings, US ISM and jobs report, China back from holiday and reports PMI, Megacap earnings

APAC Strategy Team

Summary:  Critical week for markets with the Fed, the ECB, and the BOE deciding on policy interest rates. The market has priced in a downshift by the Fed to a 25bp hike, bringing the Fed Fund target to 4.50%-4.75%, while the ECB sticking to its gun of a 50bp hike. The expectation for the BOE action is mixed with a slightly higher odd assigned to a 50bp increase. US ISM and job data will be pivotal for the direction of the next market movement, in conjunction with earnings announcements from the mega-caps Apple, Alphabet, Amazon, and Meta. Investors also have their eyes on China as it returns from a week-long holiday on the back of solid traffic and consumption data during the Lunar New Year.

The Fed is expected to downshift again

The expectations of a soft landing have picked up since the start of the year, relative to the rising recession bets seen in H2 of last year. Meanwhile, inflation has been on a steady downtrend in the last six months, which has allowed the Fed to downshift to a 50bps rate hike in December after a spate of rate hikes in 75bps increments before that. The consensus expects the FOMC will downshift again to lift its Federal Funds Rate target by 25bps to 4.50-4.75% on February 1, although some still expect the central bank to hike rates by a larger 50bps increment. Fed speakers have also broadly guided for a smaller hike at the next meeting. With economic data remaining volatile, there is some reason to believe that Powell and team may be aiming to lengthen the hiking cycle in order to buy more time to assess both the incoming data and the impact of their previous aggressive rate hikes. This warrants a smaller rate hike of 25bps at the February 1 decision. The key risk factor, favouring another 50bps rate hike, could be the financial conditions which are the easiest since April 2022 or the risks of another shoot higher in inflation due to China’s reopening and the resulting rise in commodity prices.

US ISM surveys and the jobs report to provide further input for the soft landing vs. recession fight

The ISM surveys are key to watch not just for activity data but also to understand if input and output price pressures are trending in the desired direction. For the manufacturing survey, the headline is expected to soften again and slip further below the 50-mark, while the ISM services survey is expected to return above 50. The jobs data can mean significant volatility for the markets as wage pressures likely soften further but the headline nonfarm payrolls still remain pretty robust and unemployment rate remains near record lows despite unending news of layoffs in tech and other sectors. All these data points will be keenly assessed by the markets which are now pricing in a soft landing. Stronger-than-expected data on growth with sustained slowing inflationary pressures will further boost the markets, while weaker-than-expected data can ignite some caution and profit taking.

China returns from buoyant Lunar New Year holiday, expecting pickups in PMIs

China returns from a week-long Lunar New Year holiday, during which, sales in consumption-related industries grew by 12.2% from the same lunar calendar period last year. Estimates of passenger traffic from various sources all pointed to a strong recovery of activities. The official NBS Manufacturing PMI and Non-manufacturing PMI, scheduled to release on Tuesday, are expected to bounce back strongly to the expansionary territory. The median forecasts from Bloomberg’s survey of economists call for the Manufacturing PMI to rise to 50.1 in January from 47.0 in December and the Non-manufacturing PMI to bounce sharply to 52.0 in January from 41.6 in December. Caixin China Manufacturing PMI, which has a bigger representation of SMEs in the eastern coastal regions, is however expected to improve only moderately to 49.8 in January from 49.0 in December. Caixin China Services PMI is forecasted to bounce to 51.6, back to expansion, from 48.0 in December. The in-person service sector, which had been hard hit during the pandemic, recovered strongly as the mobility and consumption data during the Lunar New Year holiday indicated.

ECB and BOE meetings likely to be pivotal this week for EUR and GBP direction

The European Central Bank (ECB) is expected to hike rates by 50bps to 2.50%, with the markets pricing in a 50bps rate hike at 86% with a 14% chance of a 75bps move. ECB speakers have been broadly hawkish, but even the most hawkish ones have hinted at multiple 50bps moves rather than another 75bps. Overall, about 140bps of rate hikes are priced in from the ECB until around mid-year, keeping ECB as the most hawkish G20 central bank. That reduces the scope of a potential hawkish surprise from this week’s meeting and means that EURUSD may have risks tilted to the downside.

The Bank of England market pricing is more mixed, with a 70% probability for a 50bps rate hike and 30% for a 25bps, and the potential for a split vote is also high. Therefore the bar for a surprise is higher, and will likely come from a revision in inflation forecasts. A steeper than expected cut in inflation forecasts could mean a sooner-than-expected end to the BOE’s tightening cycle, likely weighing on the GBP which seems to be ignoring the economic headwinds facing the UK economy for now.

Oil supply to shrink, will oil pop or see profit taking ahead of OPEC meeting, with oil equites to follow

Oil could be ready to pop with Chinese demand expected to rise, while supply concerns pick up, with the EU embargo on Russian seaborne fuel exports kicking in on February 5. However, traders may book in profits and play it safe ahead of the OPEC+ committee meeting on February 1 and ahead of the FOMC outlook on interest rates in the US on Wednesday. It is expected that the OPEC+ countries won’t boost production which could underpin prices at a time when diesel demand is rising amid travel picking up in the Asian pacific region (with aircraft travel almost back at 2019 levels). Traders have also been watching energy names such as Chevron- its share are up 27% from the September low, Occidental Petrolum is up 15%, Marathon Oil is up 35% from its September low. For more on oil’s fundamental, and other commodities, click here.

The China reopening drives the biggest monthly jump in Australian stocks since 2020

Australia’s share market, the ASX200(ASXSP200.I) is outperforming the S&P500 and Nasdaq, with a gain of 16% from its low - while also recording its biggest monthly gain since November 2020, (up 6.4%). Australia’s market - a dividend and commodity play, as well as being an investment proxy for China's reopening could also continue to outperform the US this year, given its heavy in materials such as iron ore, copper and aluminium, as well as financial companies - benefiting from higher interest rates. Mining giant BHP Group expects 17% dividend growth, Fortescue Metals sees higher sales in the first half of 2023 to China. Also consider, the iron ore price hit a new 2023 on the notion demand will rise. However, the iron ore (SCOA) price could be at risk of short-term correction, given it has rallied up almost 70%. So consider potentially taking profits given BHP shares are up 46% from their July low, Rio Tinto’s up 43%, Fortescue is up 53%. Although there is a risk of a short-term correction, as supply is lower than a year ago, the price over the longer term seems underpinned. Also consider sales to China have been increasing with Fortescue reporting greater buying of port side iron ore to 4.0mt (in the prior quarter), while guiding for H1 sales to rise to 9.3mt. Lastly, consider Australian insurers, banks and financials will likely benefit from the RBA’s rate hikes - QBE and WBC are expected to report profit jumps of over 30%.

Key U.S. corporate earnings

As of 27 January, 143 or 29% of the S&P 500 companies have reported Q4 earnings. Overall, 41% of those who reported results beat street estimates and 41% were in line with estimates. The information technology, healthcare, and materials sectors had the highest percentage of companies reporting positive surprises.

This week, Whirlpool (WHR) on Monday, General Motors (GM) and McDonald’s (MCD) on Tuesday, Amazon (AMZN), Ford Motor (F), and Starbucks (SBUX) on Wednesday will inform us of the latest state of U.S. consumers. Among them, the focus will be on Amazon, for which, the street consensus forecasts an 88% Y/Y decline in Q4 EPS to USD0.172. The business outlook from United Parcel Service (UPS), reporting on Tuesday, will be closely monitored for a glimpse of the health of global economic activities. Also reporting on Tuesday, Advanced Micro Devices (AMD) is expected to register a 27% Y/Y decline in EPS, reflecting the headwinds faced by the semiconductor industry as indicated in the poor results and downbeat guidance from Intel (INTC) reported last week. Investors will also watch Qualcomm’s results on Thursday closely for additional insight into the semiconductor and telecommunication equipment industries.

The most-watched results this week will be mega-cap names Meta Platforms (META) on Wednesday, and Alphabet (GOOGL) and Apple (AAPL) on Thursday. The median forecasts from street analysts are expecting the latest quarterly EPS to decline by 40% to USD2.22 at Meta, by 22% to USD1.20 at Alphabet, and by 7% to USD1.95 at Apple.

  • Monday: Whirlpool (WHR), GE Healthcare Technologies (GEHC)
  • Tuesday: Electronic Arts (EA), General Motors (GM), McDonald’s (MCD), NVR Inc (NVR), PulteGroup (PHM), Exxon Mobil (XOM), Marathon Petroleum (MPC), Phillips 66 (PSX), Amgen (AMGN), Pfizer (PFE), Caterpillar (CAT), United Parcel Service (UPS), Advanced Micro Devices (AMD), Corning (GLW)
  • Wednesday: Meta Platforms (META), T-Mobile (TMUS), Altria (MO), Metlife (MET), Boston Scientific (BSX), Thermo fisher scientific (TMO)
  • Thursday: Apple (AAPL), Alphabet (GOOGL), Amazon (AMZN), Qualcomm (QCOM), Ford Motor (F), Starbucks (SBUX), ConocoPhillips (COP), Intercontinental Exchange (ICE), Bristol-Myers Squibb (BMY), Eli Lilly (LLY), Gilead sciences (GILD), Merck (MRK), Honeywell (HON),
  • Friday: Cigna (CI)

Key economic releases & central bank meetings this week

Monday 30 January

  • Eurozone         Economic, industrial & services confidence (Jan)

Tuesday 31 January

  • U.S.     Employment cost index (Q4)
  • U.S.      Chicago PMI (Jan)
  • Eurozone GDP (Q4)
  • Germany GDP (Q4)
  • France GDP (Q4)
  • JapanIndustrial production (Dec)
  • Japan  Retail sales (Dec)

Wednesday 1 February

  • U.S.     FOMC decision
  • U.S.      ADP private employment (Jan)
  • U.S.      ISM manufacturing (Jan)
  • Eurozone EU harmonized CPI (Jan)
  • Hong Kong GDP (Q4)

Thursday 2 February

  • U.S. Unit labor costs (Q4)
  • Eurozone ECB meeting
  • U.K.Bank of England rate decision

Friday 3 February

  • U.S.      Non-farm payroll, unemployment rate, average hourly earnings (Jan)
  • Singapore Retail sales (Dec)

 


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