Top 5 Things to Watch in Markets in the Week Ahead

Investing.com

Sun, Oct 16, 2022, 12:50 AM 4 min read

Investing.com -- U.S. earnings season gets underway against a background of worries that the Federal Reserve’s aggressive rate hike campaign could tip the economy into a recession. Investors will get an update on the U.S. housing market where the increase in borrowing costs has already led to cooling demand. Appearances by several Fed officials are also on the agenda. In the U.K., Jeremy Hunt will his first full week as Chancellor after Prime Minister Liz Truss was forced to fire his predecessor. Elsewhere, third quarter economic data out of China is likely to underline the challenges facing the world’s number two economy, while in Japan the yen is back on intervention watch. Here’s what you need to know to start your week.

Earnings

Third-quarter earnings season gets underway with companies reporting results amid a challenging environment due to the stronger dollar and persistently high inflation.

Reuters reported that earnings for S&P 500 companies overall are expected to have climbed 4.1% from the year-earlier period, which would be the slowest growth since the fourth quarter of 2020.

But more focus may be on how executives project the future; consensus analyst estimates are for a nearly 8% rise in profits next year, according to Refinitiv IBES, but many investors are dubious of that forecast as recession risks loom.

A selloff in markets has lowered stock valuations, but a downgrade in the earnings outlook could dampen equities' attractiveness. Companies due to report earnings in the coming week include Tesla (NASDAQ:TSLA), Netflix (NASDAQ:NFLX) and Johnson&Johnson (NYSE:JNJ).

U.S. housing data

In the wake of last week’s hotter-than-expected U.S. inflation data focus will turn to the housing market with reports due on building permits, housing starts and existing home sales.

House prices fell for the first time in over 10 years in July as rising interest rates hit housing demand, while mortgage applications have also fallen.

The economic calendar also includes reports on industrial production, the Philly Fed Manufacturing Index, the Empire State Manufacturing Index, and initial jobless claims.

Regional Fed presidents Neel Kashkari, Charles Evans and James Bullard are also due to make what will be closely watched appearances.

On Saturday, Bullard said last week’s CPI figures showed that inflation had become "pernicious" and left the door open to 75 basis point rate hikes at the Fed’s upcoming meetings in November and December but added that it was too early to make that call.

U.K. tries to restore calm

Battered British government bonds will resume trading on Monday without the support of the Bank of England’s emergency bond buying program, which ended Friday.

Britain's new Chancellor Jeremy Hunt has said he will repair the country's public finances after the original economic plan put forward by Liz Truss and former Chancellor Kwasi Kwarteng roiled financial markets.

Reports that the government is preparing to do a major U-turn on planned tax cuts have helped ease fears over public finances, but this will need to materialize into concrete plans to avoid a renewed selloff in bonds.

Investors will also be looking at Wednesday’s U.K. inflation data for September, which is expected to hit double digits amid a cost-of-living squeeze while retail sales figures on Friday are expected to point to a decline in consumer spending.

Chinese data

China is to release third quarter GDP data on Tuesday and while growth is expected to rebound from the prior quarter the economy is still on track to post its slowest annual rate of growth in nearly 50 years.

The annual rate of growth is expected to pick up 3.4% in the three months to September, from 0.4% in the second quarter.

Stringent COVID-19 curbs along with supply chain disruptions caused by the war in Ukraine plus slowing global growth due to sharp increases in borrowing costs to curb inflation have weighed on the world's second-largest economy.

Analysts expect China’s economy to grow 3.2% in 2022, well below the official target of around 5.5%.

Investors will be watching the weeklong Communist Party Congress, which got underway on Sunday for any indications on economic policy.

Yen intervention?

Foreign exchange traders will be closely watching the yen amid speculation that the Bank of Japan could take fresh steps to shore up the currency after intervening in markets last month for the first time since 1998.

BoJ Deputy Governor Masazumi Wakatabe said on Saturday the yen's recent fluctuations were "clearly too rapid and too one-sided," pointing to concerns over potential economic fallout from the currency's slump to 32-year lows against the dollar.

Japan intervened in the foreign exchange market in September to stem steep falls in the yen, which were driven largely by the policy divergence between aggressive rate hikes by the Fed and the BoJ's ultra-loose monetary policy aimed at hitting its 2% inflation target.

Japan is an outlier among global central banks, many of which are raising interest rates to combat red-hot inflation as it focuses on supporting a fragile economic recovery.

--Reuters contributed to this report

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