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Risk-off trades prevail ahead of FOMC meeting and big tech earnings

the Fed

Asia markets are likely to face ongoing pressure, sparked by the US Federal Reserve-induced sell-off in US stocks.

US markets fell for the fourth straight trading day last Friday. The Nasdaq slumped 2.72%, which deepened its sell-off, as Netflix plunged 22% due to weak first-quarter guidance. US stocks had their worst week since March 2020. The S&P/ASX 200 tumbled 2.27%, to a six-month low on Friday.

The broader stock markets will certainly remain choppy ahead of the FOMC meeting on Thursday when the Fed is expected to keep its hawkish tone on a faster pace on tapering, sooner rate hikes, and the balance sheet unwinding. Coinciding with the Mega-cap companies’ fourth quarter’s earnings reports, investors will be more cautious about the tech giants, such as Apple, Microsoft, and Tesla’s performances and the future guidance of their businesses.

Elsewhere, the Bank of Canada will also hold its policy meeting a few hours before the Fed on Thursday. The flash manufacturing PMIs in the major European countries are the bellwether to measure omicron’s impact on the region’s economy. Australia and New Zealand’s Q4 CPI data are due on Tuesday and Thursday respectively.

FOMC meeting, US GDP, durable goods, PCE, tech earnings

The Fed’s first policy meeting in 2022 will be held on January 25-26. Fed Chairman Jerome Powell has indicated a more aggressive pace to tighten policy to combat the decades-high inflation.  Dip-buyers might be waiting for a less hawkish tone from the Fed or a “Buy the Fact” opportunity as the stock markets have been priced in a big way since the beginning of January.

Apart from the Fed meeting, a slew of economic data is also worth attention from investors. The US advanced fourth-quarter GDP is due on Thursday together with the December durable goods orders. US GDP growth might accelerate to 5.4% from 2% in the third quarter, while the durable goods orders could record a downturn of -0.5% in December, according to Thomson Reuters. Another focus would be the December Personal Consumer Expenditure (PCE) on Friday, which is being seen as the most important economic measurement for the Fed to adjust policy. The PCE rose to almost 5% YoY since the September quarter. It is another indication that US inflation will not be cooling any time soon.

Earnings from big banks and airline groups did not help the market sentiment as squeezed profit margin and omicron induced rising costs weakened first-quarter outlooks. Netflix’s plunge put the tech shares on edge. Investors will be watching closely the technology giants’ fourth-quarter performances. Apple, Microsoft, and Tesla are to report earnings on Wednesday and Friday.

Australia and New Zealand CPIs

Both Australia and New Zealand are to release their fourth-quarter Consumer Price Index (CPI) this week. The Australian data might suggest that the inflation rate goes higher to 1% from the third quarter and 3.2% YoY. The RBA is expected to end its asset purchase program earlier at its February 1 board meeting if inflation pressure remains. On the other side of the Tasman Sea, New Zealand’s CPI might reflect much more of a worry for the local central bank, which is being forecasted at an even higher level at 5.6% in the fourth quarter. RBNZ increased the OCR two times last year, and is expected to raise rates more aggressively at its February 23 meeting.

Bank of Canada policy meeting

Bank of Canada is widely expected to raise its interest rate by 25 basis points this time, as the Canadian CPI data shows that inflation accelerated in December to hit a 30-year high at 4.8%. Now the markets have priced in with 85% in the probability for the central bank to have its first rate hike this week.

Europe and UK Flash PMIs

The major European countries' flash PMIs in both manufacturing and services sectors are to be released on Monday. In the backdrop of the recent omicron outbreak and more restrictions, the data might point to slower growth than December. The German Flash Manufacturing and services PMIs are forecast at 57.0 and 48 respectively, less than the previous numbers at 57.4 and 48.7.

The UK PMIs will be reported on the same day, but the consensus shows stronger growth than in December. The UK manufacturing flash PMI is forecast at 57.9, while the service flash PMI is at 54.8 vs. 57.6 and 53.2 in December.

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