Week Ahead: US CPI and Q4 Earnings Season Begins

Last week, markets maintained their course regarding the “bad news is good, good news is bad” theme that has been present since the Fed began raising interest rates in March of last year.  Markets chose to focus on weaker Average Hourly Earnings rather than the lower Unemployment Rate to guide their trading decisions in hopes of a less hawkish Fed.  Is the market on the right track?  This week, Fed Chairman Powell will participate in a panel discussion and the US will release CPI data for December.  Will they show that the markets are correct in the dovish assumptions.  In addition, Q4 2022 earnings season kicks off on Friday, with many of the large Wall Street Banks reporting. Traders will be watching to see higher interest rates helped or hurt the big banks.

Spillover from Friday’s economic data

Non-Farm Payrolls released on Friday showed that the US economy added 223,000 new jobs to the economy in December vs an estimate of +200,000.  In addition, the November print was revised to +256,000.  The Unemployment Rate fell to 3.5% from 3.6% and an expectation of 3.7%.  These two data points alone should have the markets fearful of a more hawkish Fed, as the Fed has said that it needs employment to cool down to lower inflation. However, markets chose to brush aside the headline data and pay more attention to Decembers Average Hourly Earnings, which fell to 4.6% YoY vs an estimate of 5% and a lower November revised print of 4.8% YoY from 5.1% YoY. In addition, US ISM Non-Manufacturing PMI for December was 49.6 vs 56.5 previously and an expectation of 55.  This was the first contraction (below 50) in the print since May 2020.  Markets are hoping that the combination of lower wage growth and a contracting services sector will allow the Fed to slow its pace of interest rate increases to 25bps (or less) on February 1^st.  As a result, stock markets and gold moved higher while interest rates and the US Dollar moved lower.  Will it continue this week?

Fed Chairman Powell and US CPI

This week, Fed Chairman Powell will participate in a panel discussion titled “Central Bank independence and the mandate – evolving views” in Stockholm.  Traders should pay attention to see if Powell drops any hints regarding the Fed’s take on the jobs data and contracting services PMI.  The slightest hint of dovishness could send stocks higher and the US Dollar lower.  In addition, on Thursday the US will release December’s CPI.  Expectations are for a headline print of 6.5% YoY vs a November reading of 7.1% YoY.  The Core CPI is expected to fall to 5.7% YoY from 6% YoY in November.  Headline inflation has been moving lower since June when it reached a high of 9.1% YoY, however the Core number has been a bit stickier.  If the data comes in weaker than expected, it could continue to send stocks higher and the US Dollar lower.

Earnings

This week will kick off Q4 2022 earnings season with big Wall Street banks leading the way on Friday. The high level of interest rates should be a positive for the banks, as the Fed has said that it will not cut rates in 2023.  However, markets are pricing in a cut for Q4 of this year as a looming recession could be right around the corner.  Net interest margins and income should be a positive for the banks, while investment banking will remain tough due to a lack of deals and listings.Other important earnings this week are as follows:  BBBY, KBH, TSM, BAC, DAL, BK, BLK, WFC, JPM, C

Economic Data

US CPI will be the headline for major economic data releases, however there are some other economic reports that should be watched for volatility.  These include CPI prints from Tokyo (which is often used as a proxy for Japan), Australia, and China.  Note that this will be the first look at China CPI since the end of lockdowns and restrictions.  Did the reopening cause prices to move higher?  In addition, the UK will release GDP and the US will release the preliminary look at Michigan Consumer Sentiment.  Markets will be watching the inflation expectation components for additional signs of lower inflation.  Other economic data to be released this week is as follows:

Monday

• Australia: Building Permits Prel (NOV)
• Germany: Industrial Production (NOV)
• EU: Unemployment Rate (NOV)
• Mexico: CPI (DEC)
• Canada: Ivey PMI s.a. (DEC)

Tuesday

• Japan: BoJ Governor Kuroda Speech
• Japan: Tokyo CPI (DEC)
• Canada: BoC Governor Macklem Speech
• US: IBD/TIPP Economic Optimism (JAN)
• US: Fed Chairman Powell Speech

Wednesday

• Australia: CPI (NOV)
• Australia: Retail Sales (NOV)
• Crude Inventories

Thursday

• New Zealand: Building Permits (NOV)
• Australia: Trade Balance (NOV)
• China: CPI (DEC)
• US: CPI (DEC)

Friday

• Australia: Home Loans (NOV)
• UK: GDP (NOV)
• UK: Industrial Production (NOV)
• UK: Manufacturing Production (NOV)
• UK: Trade Balance (NOV)
• Germany: Full Year GDP (2022)
• EU: Industrial Production (NOV)
• EU: Trade Balance (NOV)
• US: Michigan Consumer Sentiment Prel (JAN)

Chart of the Week: Daily Natural Gas (NATGAS)

Source: Tradingview, Stone X

Natural Gas has been weakening dramatically over the past few weeks as warmer than expected temperatures have been sweeping across Europe.  On Friday, the commodity traded to its lowest level since the summer of 2021, making an intraday low of 3.549.  However, NATGAS has been moving lower since making a high print of 10.001 on August 22, 2022. Price formed a head and shoulders pattern off the high and broke the neckline on September 16^th, 2022.  Natural Gas reached the target by October 18^th, 2022, near 5.658 and bounced briefly above 7.000.  A continued selloff ensured, bringing it all the way down to current levels near 3.75.  If price breaks Friday’s low, the next level of support isn’t until the highs from June 15^th, 2021, at 3.329 and then the lows from April 6^th, 2021, at 2.439.  However, if the support holds, the first level of resistance is the gap fill from December 31^st at 4.416.  Above there, price can move to horizontal resistance at 5.101 then the highs of December 19^th at 6.142.

Asset prices moved aggressively across the board on Friday as markets viewed the economic data releases as “less hawkish” for the Fed. However, the second week of the year brings with it more US inflation data in the form of CPI and the Michigan Consumer Sentiment Index.  In addition, Powell will be speaking.  If the markets sense any hints of less hawkishness this week, the price moves from Friday could be extended!

Have a great weekend!