Week Ahead: Inflation Data, FOMC Minutes, and Earnings Season Kicks Off

Last week, the US Non-Farm Payrolls data threw cold water on those market participants who were hoping for a Fed pivot.  The in-line print of 263,0000 jobs sent stocks south, while the US Dollar went bid. This week, markets will get a look at inflation data from the US, as both the September CPI report and the Michigan Consumer Sentiment Index are due.  Will these mid-month reports continue to shine light on a strong chance of a 75bps hike at the Fed’s November 2^nd meeting?  In addition, the FOMC minutes will be released from the September 21^st meeting.  Just how hawkish was the Fed? Also, this week kicks off earnings season, beginning primarily with US banks.  Did increasing interest rates help their bottom lines.

Fed Pivot?

With central bank invention over the last few weeks by the Bank of Japan and the Bank of England, markets all wondered “who’s next?”.  Well, it may have not been an intervention, but the RBA sent a message to the markets that it was willing to slow the pace of tightening by only hiking rates by 25bps, while a 50bps hike was expected.  In addition, the National Bank of Poland kept rates unchanged, while markets were expecting a hike of 25bps.  Not only that, but the UN last week called for all central banks to slow the pace of rate hikes, saying that the world would enter a recession possibly greater than that of the GFC or Covid-19 if they keep it up.

With all that in mind, that markets were speculating that the Fed could soon be pivoting.  However, those hopes were dashed as September’s Non-Farm Payroll data showed that the US added 263,000 jobs to the economy, as the Unemployment Rate fell to 3.5%.  Fed Chairman Powell has maintained that the Fed would sacrifice some of the Unemployment Rate in order to bring down inflation.  However, it doesn’t appear that the Fed’s rate hikes, from 0% to 3.25%, have had much of an effect on the jobs market. Therefore, the Fed is likely to continue with its aggressive rate hikes…… that is, unless inflation suddenly falls.

Inflation

On Thursday, markets will get a chance so see how inflation held up during the month of September as the US releases its CPI report. Expectations are for the headline print to fall to 8.1% YoY from 8.3% YoY while the Core CPI is expected to increase to 6.5% YoY from 6.3% YoY. On Friday, the US will release the Preliminary Michigan Consumer Sentiment Index for October.  The 1-year inflation component is expected to be 4.7% while the 5-year inflation component is expected to be 2.7%.  If the inflation data is lower than expected, will the Fed be more inclined to hike rates by less than 75bps?

FOMC Minutes

The Minutes from the FOMC meeting on September 21^st will also be released on Wednesday this week.  Recall that at the September meeting, the FOMC hiked rates by 75bps to bring the Fed Funds rate to its current level at 3.25%.  In addition, the “Dot Plots” showed that inflation would be at 5.4% at the end of 2022 and 2.8% at the end of 2023.  The Fed also saw the Fed Funds rate climbing to 4.4% by the end of 2022 and 4.6% at the end of 2023.  This would imply an increase of 75bps in November and an increase of 50bps in December.  They also see the Unemployment Rate at 3.8% at the end of 2022 and 4.4% at the end of 2023.  In my humble opinion, this does not sound like the type of data that would suggest the Fed was even remotely thinking about pivoting any time soon, and the Minutes should reflect that.

Earnings

This week kicks off earnings season with some of the biggest names in the banking industry, including JP Morgan, Citigroup and Bank of America.  How much did increasing interest rates help banks to make money in Q3?  In addition, Delta Airlines will tell us how much the airline has returned to pre-pandemic levels and whether it was able to continue to handle high fuel costs.Other notable earnings releases are as follows:

DAL, AA, PEP, SCHW, BLK, WBA, UNH, JPM, WFC, C, MS

Economic Data

As mentioned above, the US inflation data will be the main focus for economic data this week.  However, there are some other key data points that should be watched this week.  They include the Claimant Count Change from the UK on Tuesday, UK GDP on Thursday, and Retail Sales from the US on Friday.  Other important economic data due out this week is as follows:

Saturday

• China: Caixin Services PMI (SEP)Monday
• Australia: Ai Group Services Index (SEP)Tuesday
• Australia: NAB Business Confidence (SEP)
• Australia: Building Permits Final (AUG)
• UK: Claimant Count Change (SEP)

Wednesday

• Japan: Reuters Tankan Index (OCT)
• Australia: Westpac Consumer Confidence Index (OCT)
• Japan: Machinery Orders (AUG)
• UK: GDP (AUG)
• UK: Manufacturing Production (AUG)
• UK: Trade Balance (AUG)
• UK: Manufacturing Production (AUG)
• EU: Industrial Production (AUG)
• US: PPI (SEP)
• US: FOMC Minutes

Thursday

• New Zealand: Food Inflation (SEP)
• Japan: PPI (SEP)
• Australia: Consumer Inflation Expectations (OCT)
• Germany: CPI Final (SEP)
• US: CPI (SEP)
• Crude Inventories

Friday

• New Zealand: Business NZ PMI (SEP)
• China: CPI (SEP)
• China: PPI (SEP)
• EU: Trade Balance (AUG)
• US: Retail Sales (SEP)
• US: Michigan Consumer Sentiment Prel (OCT)

Chart of the Week: 240-minute USD/JPY

Source: Tradingview, Stone X

The Bank of Japan intervened in the fx market on September 22^nd, buying Yen vs other currency pairs. For USD/JPY, the pair fell from a high value of 145.90 down to 140.35. However, since then, USD/JPY has retraced almost that whole range, closing Thursday above 145 for the first time in 24 years.  On Friday, with the US Dollar continuing to go bid, USD/JPY is closing in on the “intervention level”.  Will the BOJ intervene again? First resistance is at the 145.90 level.  Above there, USD/JPY can move up to the 127.2% Fibonacci extension from the intervention highs to lows, near 147.41.  The next level of resistance is the top trendline of a long-term channel that the pair has been in since March, near 148.50.  If the BOJ does not come in, first support is at the bottom trendline from the lows of the intervention near 144.14.  Below there, support is at the lows of October 4^th at 143.49, then horizontal support at 142.64.  If the BOJ does intervene, expect that USD/JPY could fall to the low from the last intervention at 140.35.

Note: Monday is a bank holiday in the US and Canada.  Conditions may be ripe for another round of BOJ intervention:  Low liquidity and low volume. Just be aware and use proper risk management.

Next week, the focus will be on inflation and earnings.  Will the Fed look to pivot if the inflation data comes out weaker?  Also, how will traders position themselves for the rest of earnings season if banks kick things off on a sour note.  WATCH THE GUIDANCE!  Also, be wary of BOJ intervention early in the week!

Have a great weekend!