US earnings

This week, we look at earnings from Netflix, Goldman Sachs, and ASML.

Earnings drove volatility last week and continue to roll in this week. Attention will be on Amazon, Apple and HSBC. Here we look at what to expect.

US indices point to a stronger start as corporate earnings continue to roll in. Earnings are providing a welcomed distraction after worries over the Fed keeping rates high for longer hurt sentiment last week. US PMI data is due shortly and is expected to show business activity grew at a faster pace. Tesla is due to report after the close after the EV maker's deliveries fell in Q1 and as the share price trades down 40% this year.

S&P 500 and the FTSE fell last week after the market pushed back Fed rate cut expectations and as geopolitical tensions hurt risk sentiment. Look ahead; US core PCE will be a key focus next week, as well as earning season with Tesla earnings and UK bank's earnings.

Earnings season starts to ramp up this week with earnings from Netflix, Bank of America, and Procter & Gamble are among those reports that investors will be watching closely.

US banks kick off Q1 earnings season on Friday, with JP Morgan, Wells Fargo, Citigroup and BlackRock reporting. The results come as the US economy continues to show resilience but as sticky inflation could mean that rates stay high for longer. Delta Airline is also releasing Q1 numbers.

Today’s payroll data reiterated the run of strong labor market data with wages growing at 4% a key concern for the Fed. Futures markets reduced the probability of early rate cuts, but traders made few changes to their bullish stance on equities, bonds, gold or the dollar.

The Dow Jones has quickly shaken off yesterday’s late losses is challenging record highs despite the comedown of the Fed minutes yesterday. The market remains optimistic over the state of the US economy, supported by today’s various jobs sector data releases; the flip-side is that too much strength could slow the pace of interest rate cuts with the Fed “likely at or near its peak rates” according to December policy meeting minutes yesterday. The Bitcoin rally will be tested pretty soon, as the SEC is intended to approve (or not) Bitcoin ETFs.

Bullish factors Statements from Federal Reserve officials may want to realign expectations of an interest rate cut by the American central bank after Powell's comments this week triggered a sharp global rally for risky assets, strengthening the American currency. Minutes of the COPOM and Quarterly Inflation Report (RTI, an acronym in Portuguese) should show a more benign external scenario for the Central Bank, maintaining expectations of cuts to the basic interest rate (SELIC), which in turn reduces the attractiveness of Brazilian assets and weakens the real. Bearish factors PCE index should maintain a trend of gradual price moderation in the US and suggest that the Fed has room for monetary easing, increasing bets on interest rate cuts by investors and weakening the American currency. The possibility of advancing important economic agendas for the government in the National Congress can ratchet down the perception of fiscal jeopardy for Brazilian assets and contribute to strengthening the BRL. Due to Christmas and the New Year, the Weekly Exchange Overview will not be published on December 22 and 29, returning on January 5, 2024. Happy Holidays!!!

Last week’s ‘pivot’ rally has inspired some lofty bull market forecasts for equity markets in 2024, but a handful of Fed Governors played Scrooge by downplaying how soon and how far rates could fall. Meanwhile the Bank of Japan could raise rates tomorrow. At home, US housebuilders are getting more optimistic against the backdrop of almost a point decline in mortgage rates.

Gold is consolidating, but it took as positive news the Fed's presumed pivot to no further interest rate increases and possible interest rate reductions. The Fed's interest rate projections, the so-called 'dot plot,' displaying the interest rate projections of individual Federal Open Market Committee (FOMC) members, are now much more closely grouped than they were in September. The technical position looks mixed, but that reflects the hefty drop from a fortnight ago. Any change in the Big Figure around two thousand is bound to attract attention and technical support for gold stands between $1,975 and $2,002 per ounce. Silver's speculative overhang position has been reduced.

‘Buy on the rumor, sell on the news’ appears to be the operative phrase on Wall Street today, with the Russell 2000 off 1.2% and Gold off 0.5% after rallies leading up to and on the announcement of the Fed’s interest rate outlook this week. A statement by the New York Fed President brought a bit of reality to the markets with skeptical comments on any near-term rate cuts.

Gold continues to glitter thanks to sharply declining bond yields, notably a major downward move in the real rate on 10-year TIPS. Other than for a 2% rally in the Russell 2,000, US equities were unchanged. The dollar lost another 1% today, making a 10% decline from its late 2022 high point.

The Fed’s offer of greater than expected rate cuts next year (if inflation behaves) spurred over one percent rallies in the S&P500, NASDAQ and Russell 2000, after being down 0.5% before the news. Bonds rallied strongly, being up over 4% along the curve. Gold jumped close to 2% and hit a new all-time high. The dollar sold off versus all major cross rates.

Oil prices continued to slide, down 4% on fears of weaker economic growth. Today’s inflation data, combined with last week’s employment data, suggests that inflation remains sticky – despite the benefit of lower energy prices. The “group think” on Wall Street is that the Fed must start pivoting early in 2024, but this has been wrong for the past 20 months. Let’s see if the Fed Chair will convincingly reassert his ‘higher for longer’ message tomorrow.

Bullish factors FOMC's monetary policy decision should curb more optimistic bets on a Fed interest rate cut in the short term and contribute to a momentary dollar strengthening. COPOM is expected to cut the basic interest rate (SELIC) by 0.50 p.p. and indicate that it will maintain the pace of reductions in the next meetings, which should harm the attractiveness of Brazilian bonds and falter the real. November CPI in the US is expected to show a slight hike compared to October and signal that the path to price stability recovery may be a bit longer and more tortuous than anticipated, increasing risk aversion and weakening currencies of emerging countries. Monetary policy decisions in the eurozone and England should reinforce the economic weakness in Europe and contribute to weakening their currencies versus the USD, favoring the American currency by contrast. Bearish factors The possibility of advancing important economic agendas for the government in the National Congress could reduce the perception of fiscal risks for Brazilian assets and strengthen the real.

Equity markets marked time ahead of the Fed’s FOMC meeting on Wednesday, with bond yields edging up, the dollar unchanged, oil bouncing off an important support and gold seeing profit-taking.