US Federal Reserve in Washington DC
At its December meeting, the Fed decided to accelerate the rate at which it was tapering its purchases of US government bonds and mortgage-backed securities © AFP via Getty Images

Will the Federal Reserve signal an interest rate rise in March?

After another month of hot inflation data, the US Federal Reserve at its two-day policy meeting next week is expected to discuss the various tools in its arsenal to combat price pressures and set the stage for an interest rate rise in March.

Since the release of its December 2021 meeting minutes earlier in January, investors and analysts have been anticipating more hawkish action from the central bank. Those minutes showed officials weighing the prospects of raising interest rates “sooner or at a faster pace” than they had initially anticipated.

Futures markets have since fully priced in a quarter-point increase at the March meeting, with a further three hikes priced in for 2022.

“Following the hawkish shift at the Fed’s December meeting, we expect Chair [Jay} Powell to use the January press conference to consolidate expectations for a March rate hike,” wrote Luigi Speranza, chief global economist at BNP Paribas.

At its December meeting, the Fed decided to accelerate the rate at which it was tapering its purchases of US government bonds and mortgage-backed securities. Winding down that programme faster gives the Fed more time to raise interest rates: the accelerated schedule now puts the taper on track to end in mid-March.

Some analysts, like Andy Brenner, head of international fixed income at NatAlliance Securities, suggested the Fed could speed up its tapering cycle further next week to give itself more flexibility around a March hike. Brenner also said the Fed was likely to begin discussing a reduction in the size of its $9tn balance sheet, another topic raised in December. Kate Duguid

Will the next crop of US earnings disappoint?

US earnings season is now well under way and some of the largest companies’ results so far have proved lacklustre.

Record full-year earnings for Wall Street bank JPMorgan were tempered by a warning that higher costs would bite into profits. Days later, Goldman Sachs pointed to a large jump in fourth-quarter expenses.

Meanwhile, projections of substantially slower growth in subscriber numbers sent Netflix’s shares tumbling — a decline which seeped into equity markets more broadly, as concerns about earnings applied fresh pressure to speculative tech stocks that had already sold off dramatically in a volatile start to the year.

The challenges conveyed by those big companies have brought the coming week’s crop of results into sharper focus. Financial powerhouses Blackstone, Mastercard and American Express are up next on the earnings roster, as are “Big Tech” behemoths Microsoft, Apple and Elon Musk’s carmaker Tesla — reporting on Tuesday, Thursday and Wednesday respectively.

Microsoft is expected to deliver earnings per share of $2.30 for the December quarter, up from $2.03 in the same period in 2020, on sales of $50.6bn, according to FactSet data. Apple’s quarterly EPS are projected to land at $1.89, up from $1.68 on sales of $119bn.

Overall, constituents of the S&P 500 blue-chip share gauge are forecast to post year-on-year earnings growth of about 23 per cent for the fourth quarter. But just over a tenth of the index’s companies had reported by the end of last week, leaving room for downward revisions.

Analysts are likely to focus on how companies are managing cost pressures against a backdrop of persistently high levels of global inflation. They will also question how far the imminent prospect of interest rate rises — implemented to contain soaring price growth — will help or hinder performance.

JPMorgan’s chief financial officer said on an earnings call that the bank should benefit from rising borrowing costs and greater loan demand. But higher rates also erode the present value of future cash flows for highly-valued technology companies, potentially rendering them less attractive as investments. Harriet Clarfelt

How much did Omicron weaken European business activity in January?

The Omicron coronavirus variant is expected to have weighed on European economic activity in January, closely watched indicators of business sentiment due to be published on Monday are forecast to show.

Economists polled by Reuters expect IHS Markit’s eurozone composite purchasing managers’ index, which tracks private manufacturing and services activity, to have weakened to a one-year low of 52.6 — dragged down by the hard-hit German services sector.

Activity in France is expected to show more resilience, with PMI readings well above those in the eurozone’s largest economy.

“With Omicron hitting some eurozone countries, notably Germany, in full only this month, the likelihood of a further drop in the index seems high,” said Sandra Horsfield, economist at Investec. However, she acknowledged that restrictions on activity have generally not been tightened as much as earlier in the pandemic, pointing to a more moderate pace of cooling than in previous waves.

Line chart of Purchasing managers' index, below 50= a majority of businesses reporting a contraction showing Omicron set to weigh on European activity

In the UK, the composite PMI index is expected to have risen to 55 from a 10-month low of 53.6 in December, reflecting an earlier spread of the latest wave. “We expect the January report to show an easing in Omicron fears as daily infection rates slowed and stricter social restrictions became less likely,” said Horsfield.

The headline figures for both the eurozone and the UK are expected to be above the 50 mark, which indicates a majority of businesses reporting an expansion, with stronger readings for manufacturing than for services.

While factories’ output across Europe is forecast to remain limited by shortages of components, “there are tentative signs that the supply constraints that held back output last year are beginning to ease”, said Horsfield. Valentina Romei

Article has been amended to reflect a correction to the chart

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