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Shares Brace For US Inflation And Earnings Season

On Monday, Asian stocks were trading underwater for the most part, as investors were on guard over US inflation data due for release this week that could result in massive interest rate hikes. Plus, the earnings season is also scheduled to begin this week and it would put pressure on profits.

Markets expecting a rate hike

The fact that the US payrolls report for June turned out to be upbeat already has the market betting rather heavily on a rate hike of 75 basis points from the US Federal Reserve this month, which has sent the dollar and bond yields higher.

Highlighting the global inflation dilemma, the Bank of New Zealand and the Bank of Canada are also expected to hike their interest rates this week. While there were some gains recorded on Wall Street the previous week, the earnings of banks on Thursday and Friday will certainly test the market mood.

Morgan Stanley and JP Morgan will publish their earnings report on Thursday, while Wells Fargo and Citigroup will do it the day after. Market analysts said that only a 6% year-on-year growth is expected in the second quarter’s earnings per share.

Even though companies are expected to meet this low bar, forward estimates are not expected to be very upbeat.

Different statistics

Analysts added that if the economy does succeed in avoiding a recession, the EPS growth will be 8% this year and will reduce to 6% next year. As for the S&P 500 index, it would be able to record an increase of just 4,300 points. There could be an 11% fall in the EPS in case of a moderate recession.

There was a 0.4% decline in the S&P 500 futures on Monday and a 0.5% in Nasdaq futures. Likewise, a 0.6% and 0.7% drop was also seen in the EUROSTOXX 50 and FTSE futures, respectively. There was a 1.2% decline in Chinese blue chips after a new sub-variant of the Omicron strain was detected in Shanghai. This has been named Omicron BA.5.2.1.

There was also a 0.7% loss in the broadest index of the MSCI of Asia-Pacific shares not including Japan. There was a 0.1% strengthening in South Korean indexes and 1.6% in Japan’s Nikkei 225.

The inflation report

One of the biggest hurdles for markets is the US consume price index report, which is due for release on Wednesday. Expectations show that there will be an increase in headline inflation to 8.8%, but core inflation could come down to 5.8%. The Federal Reserve will also be keeping an eye on expectations of consumer inflation.

Market analysts said that these releases should show unexpected weaknesses in order to reduce the possibility of a 75 basis points increase in the interest rate. The expectations had already risen after the release of the US payroll report. There was also an increase of 10 basis points in Treasury yields after that report, which climbed to 3.09% on Monday, which was higher from a low of 2.746%.

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