Take Five: The Bottom Line

(Reuters) – The earnings bonanza rumbles on, with U.S. media and consumer stocks and big oil and renewables topping the list in Europe.

Australia and India’s central banks are navigating the shifting sands of data and markets are digesting what the world’s top central banks have to offer. The question is what impact this will have on bonds and stocks markets after a stellar January?

Here’s a look at the week ahead in markets from Kevin Buckland in Tokyo, Amanda Cooper, Dhara Ranasinghe and Karin Strohecker in London and Lewis Krauskopf in New York.

1/ SHOW MUST GO ON

    Media and consumer industry stocks take their turn at the fore as another batch of U.S. results is set to land.

    Walt Disney, which faces a proxy battle over board representation, and News Corp, which scrapped a plan to reunite with Fox Corp, are reporting on Wednesday and Thursday, respectively, with the New York Times also up on Wednesday.

    Earnings from PepsiCo and Kellogg on Thursday will offer insight into how consumers are grappling with inflation. All told, more than 90 S&P 500 companies are expected to post results in coming days.

    With 190 companies having reported, S&P 500 earnings are set to have declined 2.4% in the fourth-quarter from a year ago – a steeper fall than the 1.6% drop predicted on Jan. 1, according to Refinitiv IBES.

2/ COMING CLEAN

Big Oil lived up to its nickname in 2022, as disruption of supplies linked to Russia’s Ukraine war and high prices translated into big profits – a record $200 billion to be exact.

Shell reported a record $40 billion profit last year. BP, TotalEnergies and Norwegian state producer Equinor are all due in coming days – as are “Big Renewables” including Danish wind-turbine maker Vestas and Germany’s Siemens Energy.

Unlike their fossil-fuel counterparts, turbine and solar panel makers have struggled to pass on higher input costs though investors have yet to penalise them for that.

Over the last three years, the iShares Clean Energy exchange-traded fund has risen by 120%, while the SPDR S&P Oil & Gas ETF has gained just 12%. Oil and gas may have won the sprint, but not the marathon.

3/ BALANCING ACT

Markets have bet on another quarter point rate hike by the Reserve Bank of Australia on Tuesday, but the economic backdrop is less clear cut than a week ago.

    Then inflation data stunned investors by shooting to a 33-year peak, defying the RBA’s most aggressive tightening campaign in modern history. Macro readings shocked the other way as retail sales fell the most since the darkest pandemic days and house prices suffered their biggest drop since at least 1980.

    The Aussie dollar’s outlook is untarnished: as long as China’s reopening is on track, the currency should push higher.

    Meanwhile, the Reserve Bank of India’s inflation fight may be over, with economists projecting another quarter point hike on Wednesday and then a pause.

4/ RUN RALLY, RUN

It was a stellar start to 2023 for markets – stocks and government bonds enjoyed one of the best Januaries on record, fuelled by optimism that the worst is over.

But will the bulls stay in charge?

Growth looking okay – tick; inflation slowing – tick; end to monetary tightening maybe in sight – tick. So far so good. January’s metrics are key as they reflect how investors have set portfolios for the year ahead, though some reckon the month could mark no more than a spate of irrational complacency.

So far, markets seem unafraid to take on central banks, betting on the prospect of a unison pause in monetary tightening that could emerge later in the year – even though policy-makers have yet to make that promise. German inflation and U.S. preliminary jobless and consumer confidence data could provide more direction for markets.

5/ SPEAK MY LINGO

And even if markets choose to ignore central bankers for now that doesn’t mean they won’t listen to what officials say. ECB policy-makers Peter Kazimir and Klaas Knot and the Bank of Canada’s Tiff Macklem speak in coming days.

Jubilant markets – U.S. Treasury yields are down 50 bps so far this year – means a loosening of financial conditions that can undo some of the rate hikes.

That’s not good for a central bank, nor is the idea that their communication is ineffective. After all, what happens in markets, especially government bonds, ripples out to the broader economy. 

With markets pricing in U.S. and European rate cuts by the year-end, central bankers are only too aware of the communication challenge they face.

Graphic: Developed markets interest rates https://www.reuters.com/graphics/GLOBAL-MARKETS/jnpwyxxmgpw/G10CEN230202.gif

(Compiled by Karin Strohecker; Additional reporting by Naomi Rovnick, Graphics by Vincent Flasseur, Vineet Sachdev and Kripa Jayaram; Editing by Barbara Lewis)