A stock market rally to kick off 2023 will be tested next week as investors face a much-anticipated inflation gauge and the start of the fourth-quarter earnings season led by big banks.
Thursday morning will see the December consumer price index (CPI) release, a release likely to dictate bets on whether the US Federal Reserve will hike interest rates by 0.25% or 0.50% early next month.
According to data from Bloomberg, economists expect December’s headline CPI to rise 6.6% yoy, down from November’s 7.1% rise. On a month-to-month basis, the CPI was likely unchanged.
The core CPI, which excludes the volatile food and energy components of the report and is closely followed by the Fed, is also likely to have risen more slowly over the past month, coming in at 5.7% after a 6% rise in November. Over the previous month, core CPI is expected to rise 0.3% after jumping 0.2% in November.
Policymakers are keeping a closer eye on “core” inflation for their nuanced look at key factors like housing, while the headline CPI index has moved broadly in tandem with volatile energy prices this year.
JPMorgan (JPM), the largest consumer bank in the U.S., is also set to report quarterly financial results Friday morning along with industry peers Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC) as fourth-quarter earnings season kicks off en route .
Wall Street’s banking giants — which have warned about the economy, seen huge falls in deal revenues and even begun to cut their workforces — are expected to deliver disappointing results for Wall Street.
Another “encouraging” job report
On Friday, US stocks rose sharply after the latest monthly jobs report showed nonfarm payrolls rose by 223,000 in December, while the unemployment rate fell to 3.5%.
While these numbers suggest that labor supply and demand imbalances still exist, investors celebrated the slowdown in wage growth as a sign that the Fed may be scaling back its rate-hike ambitions.
The story goes on
For the week, the S&P 500 and Dow Jones Industrial Average each gained about 1.5%, while the tech-heavy Nasdaq Composite gained 1%. All three major moving averages rose more than 2% on Friday.
“This is an encouraging jobs report for the Fed, showing that the narrow road to a soft landing on a wage slowdown remains possible without the need for widespread job killing,” said Josh Jamner, investment strategy analyst at ClearBridge Investments, in a note dated Friday. “These pressures alone do not clearly support a 25 or 50 basis point hike at the next Fed meeting in February and as a result Thursday’s CPI release could prove crucial to that decision.”
The Federal Open Market Committee (FOMC), the group of Fed officials who vote on policy changes, is expected to meet Jan. 31-February 1 and deliver the first rate hike of 2023 and the eighth of the current hike cycle. Last month, the Fed hiked interest rates by 50 basis points, bringing the benchmark rate to 4.25% for 2022 as a whole.
Alexandra Wilson-Elizondo, head of multi-asset retail investments at Goldman Sachs Asset Management, said Friday’s jobs report complements a string of economic releases that continue to cast the same odds of a 25 or 50 basis point rate hike at the next meeting. In other words, uncertainty remains.
“The [December jobs] The report will most likely add to the growing narrative of a disinflationary environment intersecting with a resilient economy and therefore a soft landing,” Wilson-Elizondo said in emailed comments. “This could prove positive for stocks in the near term; however, our positioning remains risk-averse into 2023.”
Wilson-Elizondo added: “It’s hard to imagine how risky assets with yields around 5% in money market funds can compete until there is more clarity on the inflation and growth mix. We expect the Fed to remain hawkish until there is clear evidence of this tightening The labor market is improving steadily.”
WASHINGTON, DC – SEPTEMBER 21: Federal Reserve Board Chairman Jerome Powell speaks during a news conference. (Photo by Drew Angerer/Getty Images)
Bank receipts show the way
JPMorgan, Citigroup, Bank of America and Wells Fargo, along with wealth management conglomerate BlackRock (BLK), are set to release all results in excitement ahead of Friday’s market open.
Banks typically benefit from tightening central bank policies, as higher interest rates increase their net interest income – or the spread between a bank’s earnings on lending and the interest it pays to depositors – and their net interest margins. However, the challenging market conditions that have dealt a blow to dealmaking, a primary profit driver, are poised to offset other aspects of their business.
“We are unlikely to see any traction in investment banking as equity and debt securities and mergers and acquisitions markets are expected to disappoint,” said Kenneth Leon, research director at CFRA Research, in a statement.
Leon also warned of “significant declines” in equity underwriting, including IPOs. According to an EY report on the IPO market last month, there were just 1,333 IPOs worldwide in 2022, based on data through December 14, with those debuts raising a total of $179.5 billion — a drop in listings by 45% and 61% fewer dollars raised compared to 2021.
Another notable component of bank earnings will be any insights that credit card balances and savings accounts offer on the health of US consumers.
Data last week from JPMorgan Asset Management, the bank’s investment management arm, estimated US households’ “excess savings” now at $900 billion, compared with a peak of $2.1 trillion in early 2021 and about 1, $9 trillion early last year. The drop shows that inflation has effectively wiped out half of the savings Americans have accumulated since the pandemic began.
UNITED STATES – SEPTEMBER 22: Jamie Dimon, CEO of JPMorgan Chase, arrives at a Senate Banking Committee hearing. (Tom Williams/CQ-Roll Call, Inc via Getty Images)
Even JPMorgan CEO Jamie Dimon warned in a recent interview that inflation could plunge the US economy into recession this year.
“Inflation is undermining everything I just said,” Dimon noted, referring to consumer balance sheets that have held up so far, “and that $1.5 trillion is going to run out sometime mid-next year.”
Elsewhere on the calendar, investors also get a real-world average hourly earnings measurement, import and export price metrics, and a review of consumer sentiment from the closely watched University of Michigan survey.
Earnings from Bed Bath & Beyond (BBBY), which faced bankruptcy last week, Delta Air Lines (DAL) and UnitedHealth (UNH) are also notable reports.
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economic calendar
Monday: consumer creditNovember ($25.000 billion expected, $27.078 billion in previous month)
Tuesday: NFIB Small Business OptimismDecember (91.4 expected, 91.9 last month); wholesale salesMoM, November (0.4% MoM); Wholesale StocksMoM, November Final (1.0% expected, 1.0% m/m)
Wednesday: MBA Mortgage ApplicationsWeek ending January 6 (-10.3% in previous week)
Thursday: consumer price indexMoM, December (0.0% exp., 0.1% mom); CPI excluding food and energyMoM, December (0.3% exp., 0.2% mom); consumer price indexYoY, December (6.6% expected, 7.1% mom); CPI excluding food and energyYoY, December (5.7% expected, 6.0% mom); Real average hourly wageyoy, December (-1.9% in the previous month, revised to -2.1%); Real Average Weekly Earningsyoy, December (-3.0% in previous month, revised down to -3.3%); Initial jobless claimsWeek ended Jan 7 (214k expected, 204k last week); Further ClaimsWeek ended December 31 (1.694 million in previous week)
Friday: import price indexYoY, December (2.2% expected, 2.7% mom); import price indexMoM, December (-0.7% exp., -0.3% mo); Import price index excluding oilMoM, December (-0.3% exp., -0.3% mom); export price indexYoY, December (6.3% MoM); export price indexMoM, December (-0.7% exp., -0.3% mo); University of Michigan MoodJanuary Preliminary (60.5 expected, 59.7 previous reading)
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results calendar
Monday: Acuity Brands (AYI), AZZ (AZZ), Commercial Metals (CMC), Price intelligent (PSMT), Tilray (TLRY), WD-40 (WDFC)
Tuesday: Albertsons (ACI), bed bath beyond (BBBY)
Wednesday: KB Home (KBH), Shaw Communications (SJR)
Thursday: Taiwan semiconductor manufacturing (TSM),
Friday: Delta Airlines (DAL), JP Morgan (JPM), Citigroup (c), Bank of America (BAK), Black Rock (BLK) Bank of the First Republic (FRC), Wells Fargo (WFC), UnitedHealth (UNH)
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Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc
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