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Federal Reserve, Earnings and Non-Farm Payrolls

By David Morrison  |  28/01/2019 15:46

There’s been a temporary halt to the US government shutdown, and there’s a lot of economic data to catch up on. The Fed meets this week and we have Non-Farm Payrolls on Friday

Last week the euro lurched lower after Mario Draghi warned that risks to the euro area growth outlook had shifted to the downside. The European Central Bank (ECB) president was speaking after the ECB kept its key interest rate on hold as expected. But after testing support around 1.1300 the EURUSD bounced, and the pair has begun this week little-changed just above 1.1400.

Sterling recovers

Sterling continues to recover after it hit a 20-month low against the dollar at the beginning of the year. Cable briefly broke above 1.3200 this morning before giving back around half a cent. Nevertheless, it is up around 5% since the New Year, despite continued Brexit uncertainty. Tuesday sees another major UK Parliamentary vote as Prime Minister Theresa May tries again to drum up support for her meaningful vote on the Withdrawal Bill.

US government shutdown

On Friday President Trump was accused of caving to pressure from the Democrats when he brought a halt to the US government shutdown without obtaining funding for his Mexican wall. However, the pause is only temporary, and Mr Trump has warned that another partial shutdown is an option should Congress fail to reach a deal on funding a border wall. The record 35-day shutdown has meant that we’ve missed some important US economic data releases including Durable Goods, Retail Sales, housing numbers, business and wholesale inventories. We should get the first look at US fourth quarter GDP on Wednesday, along with some other delayed economic numbers. Friday will see the release of Non-Farm Payrolls and the ISM Manufacturing PMI which fell so sharply just one month ago.

Fed rate decision

Wednesday sees the Fed’s first monetary policy meeting of 2019. While it is certain that there won’t be any changes to rates this time round, analysts will be pouring over the statement and will also pay close attention to Fed Chairman Jerome Powell’s subsequent press conference. Market participants are hoping to hear the Fed’s thinking on its balance sheet reduction programme. Last Friday the Wall Street Journal wrote that the Federal Reserve was considering an earlier-than-expected end to its bond portfolio runoff. The paper reported that officials were considering what the eventual balance sheet target should be, with many believing that it will be considerably larger than originally planned when quantitative tightening began just over two years ago. This is considered quite a turnaround in the Fed’s thinking. Back in November Mr Powell said that the balance sheet reduction would run on “autopilot” inferring that it would hardly be noticed by investors. The balance sheet has fallen to around $4 trillion from $4.5 trillion and was expected to reduce by around $50 billion per month for anything between three and four years. But all it took was a long overdue correction in equities for Powell’s Fed to start a furious retreat. Thanks to a sudden dovish pivot from the central bank, equity markets have rallied sharply. But now investors want some substance on top of the rhetoric. After all, the Fed is still reducing its balance sheet and thereby reducing liquidity. At the same time, the ECB is sounding more dovish while the People’s Bank of China is hosing liquidity into the financial system. So, this is telling us that there are some serious issues with the plumbing of the global economy. Equities ended higher on Friday but had given up gains ahead of Monday’s open.

Earnings season

Aside from this week’s Fed meeting, US-China trade talks will take place in Washington between Wednesday and Friday. But this is also an important week for corporate earnings. Before today’s open, construction bellwether Caterpillar reported its fourth quarter results. The share price slumped by 9% in early trade after the company announced earnings per share (EPS) of $2.55 on revenues of $14.3 billion on expectations of $2.99 and $14.36 billion respectively. This was Caterpillar’s biggest EPS miss since 2009 and provided further evidence of the slowdown in China. The company also released disappointing forward guidance. Soon after, chip-maker Nvidia also downgraded its forward guidance, blaming China, with results due in just over a fortnight. This week also sees some important tech companies release earnings. Apple reports after tomorrow’s close, and bear in mind that last year the company downgraded its sales numbers for this quarter. Facebook, Boeing, Alibaba and Microsoft release results on Wednesday with Amazon, Samsung and Royal Dutch Shell on Thursday. Friday sees results from Exxon Mobil, Chevron, Merck and Sony.
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