What you need to know this week

The stock market rally that will begin in 2023 will be tested next week when investors face a long-awaited inflation reading and the start of the fourth-quarter earnings season, which will be led by the big banks.

Thursday morning will bring December’s Consumer Price Index (CPI), which will likely dictate bets on whether the Federal Reserve will raise interest rates by 0.25% or 0.50% early next month.

Economists expect headline CPI to rise 6.6% in December from a year earlier, down from the 7.1% increase seen in November, according to Bloomberg data. On a monthly basis, the CPI probably remained flat.

The core CPI, which strips out the volatile food and energy components of the report and is closely watched by the Fed, is also expected to rise at a slower pace next month to 5.7% after a 6% increase in November. In the previous month, core CPI is expected to rise 0.3% after a 0.2% jump in November.

Policymakers are watching “core” inflation more closely because of its nuanced view of key inputs such as housing, while the headline CPI figure has moved largely in tandem with fluctuating energy prices this year.

JPMorgan ( JPM ), the largest U.S. consumer bank, will report quarterly financial results Friday morning along with industry peers Citigroup ( C ), Bank of America ( BAC ) and Wells Fargo ( WFC ) as fourth-quarter earnings season kicks off. Continue.

Wall Street’s banking giants, which have warned about the state of the economy, seen huge declines in deal revenue and even begun cutting workforces, are expected to deliver disappointing results on the Street.

Another “encouraging” job report

US stocks rose on Friday after the latest monthly jobs report showed nonfarm payrolls rose 223,000 in December as the unemployment rate fell to 3.5%.

While the numbers show that labor supply and demand are still in balance, investors pointed to the cooling of wage growth as a sign that the Fed may scale back its rate hike ambitions.

For the week, the S&P 500 and Dow Jones Industrial Average each gained about 1.5%, while the tech-heavy Nasdaq Composite rose 1%. All three major averages rose more than 2% on Friday.

“This is an encouraging jobs report for the Fed, as a narrow path to a soft landing remains a possibility as wages cool without requiring extensive job destruction,” Josh Jamner, investment strategy analyst at ClearBridge Investments, said in a note on Friday. “This print by itself does not clearly support a 25 or 50 basis point hike at the Fed’s next meeting in February, and as a result, Thursday’s CPI release could be crucial to that decision.”

The Federal Open Market Committee (FOMC), the group of Fed officials that votes on policy changes, will meet Jan. 31-Feb. 1 and introduce the first rate hike of 2023 and the eighth rate hike of the current cycle. Last month, the Fed raised interest rates by 50 basis points, bringing the total increase in the benchmark policy rate to 4.25% in 2022.

Alexandra Wilson-Elizondo, head of multi-asset retail investing at Goldman Sachs Asset Management, said Friday’s jobs report added to a string of economic releases that continue to equate to another rate hike of 25 or 50 basis points. meeting In other words, uncertainty remains.

“The [December jobs] The report is likely to add to the growing narrative of an inflationary environment intersecting with a solid economy and thus a soft recession,” Wilson-Elizondo said in emailed comments. “This could be positive for stocks in the short term; However, our positions are at risk until 2023.”

Wilson-Elizondo added: “Until there is more clarity on the mix of inflation and growth, it is difficult to see how risky assets can compete with returns of around 5% in money market funds. We expect the Fed to remain restrictive until there is clear evidence of tightening in the labor market. is getting better.”

WASHINGTON, DC – SEPTEMBER 21: US Federal Reserve Chairman Jerome Powell speaks during a press conference. (Photo by Drew Angerer/Getty Images)

Bank earnings lead the way

JPMorgan, Citigroup, Bank of America and Wells Fargo, along with asset management conglomerate BlackRock ( BLK ) are all set to report results on the turmoil before the market opens on Friday.

Banks typically benefit from tightening central bank policy, as higher interest rates increase their net interest income – or the difference between a bank’s earnings on lending activities and the interest it pays to depositors, and its net interest margin. However, tough market conditions hitting deals, a key profit driver, are poised to offset other aspects of their business.

“We won’t see any traction in investment banking, as the equity and debt underwriting as well as the mergers and acquisitions markets are expected to show disappointing performance,” said Kenneth Leon, research director at CFRA Research.

Leon also warned of “significant reductions” in equity underwriting, including IPOs. According to a report on the IPO market from EY last month, there were a total of 1,333 initial public offerings worldwide in 2022 as of December 14, raising a total of $179.5 billion – a 45% decline in listings and a 61% decline in listings. is less. dollar has increased compared to 2021.

Another notable component of bank earnings will be any data on U.S. consumers’ health-related credit card balances and savings accounts.

Estimated “excess savings” for U.S. households are now 900 percent lower than a peak of $2.1 trillion in early 2021 and about $1.9 trillion early last year, according to data from JPMorgan Asset Management, the bank’s investment management arm, last week. billion dollars. The drop shows that inflation has effectively wiped out half of the savings Americans have amassed since the pandemic began.

UNITED STATES - SEPTEMBER 22: JPMorgan Chase CEO Jamie Dimon arrives at a Senate Banking, Housing and Urban Affairs Committee hearing on the Annual Review of the Nation's Biggest Banks at the Hart Building on Thursday, September 22, 2022.  (Tom Williams).  /CQ-Roll Call, Inc via Getty Images)

UNITED STATES – SEPTEMBER 22: JPMorgan Chase CEO Jamie Dimon arrives at a Senate Banking Committee hearing. (Tom Williams/CQ-Roll Call, Inc via Getty Images)

Even JPMorgan CEO Jamie Dimon warned in a recent interview that inflation could push the US economy into recession this year.

“Inflation is eroding everything I said,” Dimon said, referring to consumer balances held so far, “and a trillion and a half dollars will be gone by the middle of next year.”

Elsewhere on the calendar, investors will also get readings on real average hourly earnings, import and export prices and a consumer sentiment check from the closely watched University of Michigan survey.

Earnings from Bed Bath & Beyond ( BBBY ), Delta Air Lines ( DAL ), and UnitedHealth ( UNH ), which said it was facing bankruptcy last week, were also notable reports.

Economic Calendar

Monday: Consumer loanNovember ($25,000 billion expected, $27,078 billion the previous month)

Tuesday: NFIB Small Business OptimismDecember (91.4 expected, 91.9 in the previous month); Wholesale Trademonth-on-month, November (0.4% on previous month); Wholesale Suppliesover the month, End Nov (expected 1.0%, 1.0% in previous month)

Wednesday: MBA Mortgage Programsweek ending January 6 (-10.3% over previous week)

Thursday: Consumer price indexmonth-on-month, December (expected 0.0%, 0.1% in the previous month); CPI excluding food and energymonth-on-month, December (expected 0.3%, 0.2% in the previous month); Consumer price indexDecember (expected 6.6%, 7.1% in the previous month); CPI excluding food and energyannualized, December (expected 5.7%, 6.0% in the previous month); Real Average Hourly Earningsyear-on-year, December (-1.9%, -2.1% in the previous month); Actual Average Weekly Earningsyear-on-year December (-3.0% last month, down -3.3%); Initial unemployment claimsweek ending Jan. 7 (214,000 expected, 204,000 last week); Ongoing claimsWeek ending December 31 (1.694 million during previous week)

Friday: Import Price Indexannualized, December (expected 2.2%, 2.7% in the previous month); Import Price Indexcompared to December (-0.7% expected, -0.3% in the previous month); Import Price Index excluding oilcompared to December (-0.3% expected, -0.3% in the previous month); Export Price Indexyear-on-year, December (6.3% in the previous month); Export Price Indexcompared to December (-0.7% expected, -0.3% in the previous month); University of Michigan EmotionJanuary Primary (60.5 expected, 59.7 previous reading)

Earnings Calendar

Monday: Sharpness Brands (BEAR), AZZ (AZZ), Trade metals (CMC), PriceSmart (PSMT), Tilray (TLRY), WD-40 (WDFC)

Tuesday: Albertsons (ACI), Bed Bath & Beyond (BBBY)

Wednesday: KB Home page (CKD), Shaw Communications (SJR)

Thursday: Taiwan Semiconductor Manufacturing (TSM),

Friday: Delta Airlines (DAL), JPMorgan (JPM), Citigroup (C), Bank of America (BAC), BlackRock (BLK), First Republic Bank (FRC), Wells Fargo (WFC), UnitedHealth (UNH)

Alexandra Semenova is a correspondent for Yahoo Finance. Follow him on Twitter @alexandraandnyc

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