Busy Week For Investors As They Wait For Fed, Earnings, and Budget Battle (Wall Street Cheat Sheet)

Last week the market ended very bullish, with the S&P 500 breaking through resistance at 4,038. Although US stocks were divided during the week and even on Friday, they rose towards the close as investors absorbed more company earnings and economic data.

However, Since October 2021, the yearly PCE inflation rate has decreased to 4.4%. The most recent data on consumer spending showed that families reduced their spending in December.

In terms of earnings, Intel surprised investors by reporting a larger-than-anticipated quarterly loss that fell short on both the top and bottom lines. On the other hand, the annual profit at Chevron doubled to a record $36.5 billion.

The final day of the week saw a spike in oil prices due to stronger-than-anticipated US economic growth and rising Chinese demand.

Turning to this week

The Federal Reserve’s announcement of its monetary policy decision, expected on Wednesday, will be the markets’ main focus. This coming week will also be a busy earnings week, with the Big Tech companies taking center stage. A “Budget Battle” may potentially increase volatility in the markets.

An unexpectedly high number of employment on Friday could move the markets significantly higher because the “bad news” is good news meaning the Fed is closer to a “pivot” in the coming months.

The Fed Decision

The Federal Reserve’s officials are adamant about continuing their interest-rate hikes. By the end of the year, they hope to see the fed funds rate between 4.25% and 4.50%, and by the beginning of next year, they want to see it between 4.50% and 4.75%. Gov. Chris Waller said that it wouldn’t change the policy outcome the day before the September employment data was released.

As mentioned last week, I fully expect the Federal Reserve to keep increasing rates as expected despite the decreasing inflation rate due to the low unemployment numbers.

As we witnessed last week, large companies have already begun laying off workers. Google, for instance, recently laid off 12,000 employees (about 6%) with little warning. Someone in management at Google informed me that many employees had been there for ten years or more, so the layoffs weren’t only about reducing the company’s size.

I don’t think these layoffs will be factored into the Fed’s rate decision.

The Fed rate decision requires a lot of time, space, and planning, which is why I compare it to turning an aircraft carrier. Moreover, I believe that Fed would lean toward making too large of an adjustment for inflation rather than too small.

To rephrase, the Fed is more concerned about inflation than it is about a recession.

Budget Battle

Disagreements over the debt ceiling are only one example of something media outlets use to catastrophize. Since the Treasury cut enough spending to prevent a technical default until at least June, the United States ‘ breach of the debt ceiling did not lead to the crisis that some had predicted.

Before a potential partial government shutdown, Congress may have fewer than five months to devise a solution. This is why I think we will see a lot of media buzz but not a full shutdown soon.

Below, I’ll list a few possible debt default scenarios.

  1. No debt has defaulted. According to the French multinational bank Societe Generale, the June debt ceiling deadline is a conservative estimate since the Treasury could wring enough money out of tax collections to buy Congress till August or September to reach an agreement.
  2. There is a new credit downgrade but no debt default. A downgrade of US debt could result from Congressional inaction on raising the debt ceiling, the credit rating firm S&P Global said in July 2011.
  3. Despite the absence of a financial default, US debt is downgraded by foreign credit agencies. The “Big Three” credit rating agencies not downgrading is an additional possibility. They might be subject to so much political pressure that their only option is to issue strong warnings.
  4. Currently, the risk is low, but we face a higher chance of default and downgrading in the future. What is more worrying is what will happen to the creditworthiness of the United States as interest rates stay high and the nation’s net interest payments rise.

Would a downgrade or technical default be disastrous? Said, yes, it could. The repercussions of a credit downgrading could be so severe that doing so would be financial suicide. A higher credit risk results in more expensive borrowing, and the increased risk almost certainly result in fewer purchasers.

Because US Treasury notes, bills, and bonds are regarded as safe-haven assets with historically high liquidity, they are in high demand globally. In the worst situation, a downgrade may cause investors to flee into safer investments, which would cause the US Treasury system to collapse.

Bond prices would plummet, rates would rise, and it might be the end of the current global financial system if there were a massive surplus of sellers rather than buyers. However, this is not the most likely result.

According to some Fed officials, the Federal Reserve would intervene to buy Treasuries in that scenario, creating enough demand to halt sellers and stabilize markets before a long-term meltdown. However, there is no guarantee that this would be sufficient, leaving the Fed once more helpless to lower its expanding balance sheet.

However, there is a compelling case that US debt will continue to be the best of some pretty poor alternatives. This is my starting point.

Where else will institutional investors invest their money (other than in commodities or precious metals) to make money for them? Not in the European Union. Not in developing economies. Not in China, where the credit or capital markets aren’t big enough to make the yuan the world reserve currency.

Particularly because of the tight capital regulations that might hinder investor withdrawals, investments in China are unsafe. The United States is still, in my opinion, the best option in this case.

CALENDAR & EVENTS

  • Wednesday February 1: Fed Interest Rate Decision
  • Friday February 3: Unemployment Rate (January)
  • Fed Talk
  • Debt Ceiling Fight

A blockbuster week ahead includes the FOMC meeting, a key OPEC gathering, and a flurry of heavyweight earnings reports. It is widely expected that the Federal Reserve will increase the target federal funds rate by 25 basis points to a range of 4.50% to 4.75%. The widespread expectation is that the Federal Reserve will maintain its tightening policy and indicate further rate hikes are still possible. While the short-term causes of inflation have diminished, the underlying issue of excessive stimulus remains.

This week, the oil ministers of OPEC will meet virtually to discuss production levels. It is anticipated that the Joint Ministerial Monitoring Committee will support the OPEC+ Oil Output Policy.

On the macroeconomic front, the end-of-the-week unemployment report is forecast to show a 225,000 increase in nonfarm payrolls, thanks partly to the conclusion of a strike by the University of California workers in late December. After a 220,000 increase in private payrolls in December, another increase of 200,0000 is anticipated for January.

Bank of America believes that, despite the robust payroll print, there are flaws in the underlying structure, particularly in manufacturing, that will become apparent in the details.

Amazon (AMZN), Apple (AAPL), Alphabet (GOOG), and Meta Platforms (MP) are just some of the major tech companies reporting earnings today (META). After recession fears, high-profile layoffs, and supply chain snarls dampen sentiment, investors hope to see the focus return to growth. Quarterly reports from Exxon Mobil (XOM), Starbucks (SBUX), and Merck are also noteworthy (MRK).

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