Economy 31.01.2022 06:03
By Noreen Burke
Investing.com – The U.S. employment report as of the reporting month of January is at the center of stock market activity this trading week. Investors are still puzzling over how aggressively the Fed plans to proceed in its fight against inflation. Earnings season also continues full steam ahead, with tech giants Amazon (NASDAQ: AMZN ) and Google parent Alphabet (NASDAQ: GOOGL ) offering a glimpse into their books. Volatility is therefore likely to remain high, partly because the Bank of England and the European Central Bank are announcing their monetary policy decisions. Here are the most important topics for the start of the new stock market week.
1. US Labor Market Report
The official U.S. jobs report as of the January reporting month is due on Friday. Economists expect the economy to grow compared to December (199.000) when the omicron variant was on the rampage, only 155.000 new jobs created.
Evidence of a continued pickup in the labor market could fuel speculation about how aggressively the Fed will tighten monetary policy in its fight against high inflation.
After its meeting last week, the Fed raised the prospect of a March rate hike. Nothing new per se, but Fed Chairman Jerome Powell hinted at more than the four rate hikes markets have already priced in for this year.
On Friday, Atlanta Fed President Raphael Bostic said the central bank could raise interest rates by as much as half a percentage point if economic data warrants it.
"All options are on the table at every meeting" Bostic said in an interview with the Financial times on Friday. " If the data shows a development that makes a 50 basis point increase necessary or appropriate, I will act on it. If it makes sense to raise interest rates one at a time, I’m okay with that", he told the magazine.
Goldman Sachs (NYSE: GS ) forecasts that the Federal Reserve will raise key interest rates five times this year instead of four previously. The first hike is expected in March, a statement from the economists said Friday evening.
2. Reporting season
There are plenty of earnings reports lined up again this week, including from heavyweights like Alphabet and Amazon , which are set to report on Tuesday and. Publish their findings on Thursday.
Tech stocks (NYSE: XLK ) are under pressure so far this year. Blame sky-high valuations on some growth stocks in an environment of rising yields as a result of the Fed’s planned tightening of monetary policy to curb inflation.
So far this reporting season, investors have focused mostly on forecasts and how companies’ ongoing global supply shortages might affect their future business results.
Wall Street investors have punished companies like Netflix (NASDAQ: NFLX ), JPMorgan (NYSE: JPM ) and Tesla (NASDAQ: TSLA ), which have failed to deliver compelling results in recent weeks.
In addition to Alphabet and Amazon, Meta Platforms (NASDAQ: FB ), General Motors (NYSE: GM ), Ford (NYSE: F ), Exxon Mobil (NYSE: XOM ), Bristol-Myers Squibb (NYSE: BMY ) and Merck (NYSE: MRK ) also report financial results this week.
3. Buy the Dip?
In response to the steep drop in the U.S. stock markets in January, many investors are wondering if now is already a good time to buy stocks at bargain prices.
The S&P 500 is down more than 9% so far in 2022, while the tech-heavy Nasdaq is in correction territory after falling nearly 15%.
Buying the dip proved to be a winning strategy for many investors over the past two years, as the massive pandemic-era stimulus programs helped the stock market reach ever new record highs. However, with up to five Fed rate hikes expected this year, investors face a new reality.
For the strategists at Barclays, the fall in share prices was not yet severe enough, which is why they said in a note at the beginning of last week that it was still "too early to buy the dip".
But if the U.S. reporting season continues to perform as well as it has so far, that could be a reason for many investors to buy into the market on the cheap.
Of the 168 S&P 500 companies that have reported Q4 results so far, 77.4% have beaten earnings expectations. This is what recent analysis by Refinitiv, a global provider of financial market data, shows.
Profits in the fourth quarter of 2021 are expected to increase by 25.2% compared to the same quarter last year. Excluding the energy sector, profits are forecast to rise 17.1 percent.
4. Bank of England interest rate hike
The BOE is expected to raise interest rates again by 0.25% at its next meeting on Thursday. The move is aimed at curbing inflation, which is at its highest level in thirty years.
In December, the BOE became the first major central bank in the world to raise interest rates since the start of the pandemic. Market watchers are therefore eagerly awaiting Governor Andrew Bailey’s comments on the future direction of interest rates.
With the expected increase in interest rates, the bank also reaches the threshold for the beginning of the reduction of its balance sheet, which could be initiated as early as March.
5. Data from the eurozone and ECB meeting
Ahead of Thursday’s ECB meeting, fourth-quarter GDP data and January inflation figures are released in the eurozone. GDP data show signs of slowing economic growth in the three months through December, while inflation is expected to ease.
Compared to the Fed and the BOE, the ECB is still miles away from raising key interest rates.
Market watchers expect no change in ECB monetary policy this week. However, ECB chief Christine Lagarde must make it unmistakably clear to the markets that the monetary guardians are sticking to their aggressive stance on inflation, but at the same time nipping premature speculation about interest rate hikes in the bud.