January has been a month to forget for many investors after hundreds of billions of dollars were wiped off equity and bond markets. Traders have shifted from the speculative corners of the market to safe haven assets as global stocks have tumbled over the past four weeks. Unprofitable growth companies, cryptos, and SPACs have felt most of the pain as the Federal Reserve prepares for its war against inflation, clearly indicating that the game has now changed following two years of extraordinary easy monetary policy.
The Fed last week indicated it would lift interest rates in March for the first time since 2018, with markets guessing how many more hikes would occur during the rest of the year. Raphael Bostic, President of the Fed’s Atlanta branch, even hinted at the possibility of a 50-basis point rate hike in March and raising rates at each of the seven remaining policy meetings. However, his base case scenario remains three 25-basis point increases for this year, though much will depend on economic data.
Stocks in Europe and the US are set to open in positive territory for the month’s final trading day following a rally in Asian equities. Investors’ fear over the prospect of tighter monetary policy has eased somewhat, and safe havens like the US dollar and Treasuries have retreated. Still, it’s a busy week full of risk events and a lot will depend on the upcoming economic data, corporate earnings, and monetary policy meetings from the BoE and the ECB.
So far, a third of the companies in the S&P 500 have reported Q4 2021 results, with 77% managing to beat EPS estimates. However, the beats are coming at a smaller margin than the 5-year average, which explains why earnings have not been very supportive of equity indices. More than 100 S&P 500 companies are due to announce results this week, including tech giants Alphabet, Meta, and Amazon. Given the new environment we’re living in today, it will require robust results and positive guidance to encourage investors to buy the latest dip in the growth sector.
On the data front, all eyes will be on Friday’s US non-farm payrolls report. The US economy is expected to have added 175,000 jobs in January, compared to 199,000 last month. However, estimates vary widely due to the disruption from the Omicron coronavirus, with some even predicting a negative print. Previously, the bad news was conceived as good news as a deteriorating jobs market meant further monetary policy easing. This time, a negative print shouldn’t deter the Fed from tightening policy, as the central bank focuses on rampant inflation. That’s why it makes more sense to focus on wage growth rather than the headline jobs figure in the report. Tuesday’s ISM Manufacturing PMI and Wednesday’s ISM Services PMI will also provide further guidance on the inflation trajectory and should be on the radar of investors.
