A likely second straight 75-basis-point rate hike from the U.S. Federal Reserve will keep markets on their toes in the week ahead, just as investors digest a wave of earnings from corporate America and Europe.
The prospect of early elections in Italy after the collapse of the government means there’s plenty of political drama too, and Australia’s latest inflation numbers may add to pressure on the country’s central bank to get ahead of the curve.
Here’s your week ahead in markets:
FED HOT
A trader works, as Federal Reserve Chair Jerome Powell is seen delivering remarks on a screen, on the floor of the New York Stock Exchange (NYSE) in New York City on May 4.BRENDAN MCDERMID/Reuters
Fed officials have poured cold water over expectations for a 100-basis-point rate hike in July but Wednesday’s meeting will still have drama aplenty.
A 75-bps interest rate hike is priced in, and coming on top of 150 bps worth of tightening so far in this cycle, that is sure to bite consumers and businesses.
Investors will be looking at whether the Fed thinks inflation is peaking and how it views the U.S. economy, as they try to gauge the scope of a September rate move.
Hanging in the balance are nascent rallies in U.S. stocks and bonds. The S&P 500 is up almost 10 per cent from its mid-June low , 10-year Treasury yields are down 60 bps.
EARNINGS: PART I
The logo for Google LLC is seen at the Google Store Chelsea in Manhattan on Nov. 17, 2021.ANDREW KELLY/Reuters
Earnings from Google-parent Alphabet, Microsoft, Coca-Cola, Apple and others will show how well corporate America is coping with soaring inflation and a strong dollar.
This year’s 17 per cent decline in the S&P 500 has lowered the index’s forward price-to-earnings ratio to around 17.3 from 21.7 at the start of 2022, closer to the market’s historic average of 15.5, according to Refinitiv Datastream.
While there have been several notable beats this season, it’s early days and many worry that earnings estimates may not hold up in the face of the highest inflation in four decades and tightening financial conditions.
Also clouding the picture is the burgeoning dollar, which makes U.S. exports less competitive and hurts firms earning much of their money abroad. Alphabet, Microsoft and Coca-Cola report on July 26, Apple and Amazon on July 28.
EARNINGS: PART II
A robot adjusts a windscreen in a fully automated process at the Daimler factory in Rastatt, Germany, Feb. 4, 2019.Kai Pfaffenbach/Reuters
One-sixth of Europe’s STOXX 600 equity index reports second-quarter results July 25-29, and Refinitiv I/B/E/S forecasts earnings to have grown 22 per cent year-on-year.
That headline figure masks disparities; earnings growth at energy firms basking in the glow of $100-a-barrel oil is seen at 185 per cent, while real estate businesses will show a 70 per cent drop, Refinitiv predicts.
Statements from retailers, heavy industry and hospitality firms may show how much pain is being inflicted by energy shortages and high inflation. The likes of Airbus, Volkswagen and Mercedes will cast light on the state of European exporters.
Bank earnings, expected to have slowed around 16 per cent, include numbers from UBS, Credit Suisse, Deutsche, Barclays and BNP Paribas.
The Q2 season will show if European shares are correctly valued around 11.5 times forward earnings, versus their 14 per cent long-term average, or need to cheapen further.
MAMMA MIA
Italian President Sergio Mattarella speaks at the Quirinale Presidential palace in Rome, on July 21.Giuseppe Lami/Pool Ansa/LaPresse/The Associated Press
A political crisis couldn’t come at a worse moment for Italy. The ECB has just jacked up rates for the first time since 2011, inflation is soaring and the country has been hit hard by its exposure to Russian gas.
The collapse of Mario Draghi’s government ends months of stability, unnerving markets that had cheered when the ex-ECB chief became prime minister in 2021. They now worry about the prospect of new elections and Rome’s ability to pass policies.
It also leaves the ECB, with its new tool to contain stress in bond markets, in an awkward position of determining which part of government bond spread widening is “unwarranted” - or giving up buying Italy’s bonds altogether.
CREDIBILITY ISSUE
A man walks past the Reserve Bank of Australia building in Sydney, Australia on Oct. 7, 2021.Mark Baker/The Associated Press
Reserve Bank of Australia (RBA) boss Philip Lowe is pledging a steady policy-tightening campaign to at least double interest rates from current levels to “chart a credible path” back to the RBA’s 2-3 per cent inflation target.
Quarterly inflation numbers due Wednesday could show a further acceleration in price growth, which at 5.1 per cent is already at its highest in two decades.
The rate-rise pledges are ironic coming from Lowe, who just months ago pushed back against markets, saying he didn’t see rates rising throughout 2022, but has since lifted them three times since May.
Criticism of the RBA’s inflation policy has led to an independent inquiry of its operations.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.