GEMFOREX - weekly analysis

As we enter the fourth week of January, here are the top 5 things to watch in the week ahead:

• U.S Debt ceiling deadlock

Last week the U.S. government hit its $31.4 trillion borrowing limit, causing a deadlock between Republicans and Democrats over increasing the countrys debt ceiling.

House Republicans want to decrease government spending before agreeing to approve a higher ceiling. Back in 2011, a similar demand prompted S&P to cut the U.S. credit rating for the first time, which in turn caused turmoil in the financial markets.

The key date regarding the deadlock will likely be June, as projections state that beyond that point in time the Treasury will have exhausted emergency measures to prevent default. So, it is likely that both sides will be testing each other for months to come.

The Chief Global Strategist of JPMorgan has stated that “From both an economic and a financial perspective, a failure to raise the debt ceiling would be an unmitigated disaster”.

• Tech earnings

Earnings results in the week ahead will test the recent jump in technology stocks, with questions looming over whether companies with super-high market caps can increase revenue and profits while cutting costs, as the U.S. economy shows signs of a slowdown and a possible recession.

Microsoft (NASDAQ: MSFT), the second biggest U.S. company by market value, will report earnings on Tuesday, followed by Elon Musk's Tesla (NASDAQ: TSLA) on Wednesday, and Intel (NASDAQ: INTC) on Thursday.

The earnings season has had an average start so far. S&P 500 companies are expected to post an overall 2.9% drop in fourth-quarter earnings versus the previous year period, according to Refinitiv data.

There has also been a string of layoff announcements. Alphabet (NASDAQ: GOOGL) announced on Friday that it will be cutting about 12,000 jobs or 6% of its workforce. Microsoft on Wednesday announced that it will eliminate 10,000 jobs. Amazon (NASDAQ: AMZN) has started notifying employees about its 18,000-person job cut.

• Eyes on Inflation

Japan will release consumer price inflation data for the Tokyo region on Friday. This will be closely watched, as the Bank of Japan last week defied market expectations for a more hawkish policy shift when it maintained the rate of yield curve control at its current levels.

Japanese inflation is currently at a forty-year high and stands at double the BOJ's 2% target. However, the BOJ is pushing back against market bets that the end of its long-standing, ultra-loose monetary policy is near. It remains to be seen.

Meanwhile, Australia and New Zealand are both due to release inflation data on Wednesday. The Reserve Bank of Australia contemplates whether its time to halt rate hikes and the Reserve Bank of New Zealand considers how much more to tighten monetary policy.

• Bank of Canada decision – 25/01 

Back in October, the Bank of Canada proceeded with a controversial move of raising rates by a less-than-expected 50 bps to 3.75%. The move suggested that central banks are starting to wake up to the possibility that too-aggressive rate rises may not have the intended effect and cause more harm than good. 

The move was then followed by another 50bps rate rise in December, to 4.25%, as concern grew that raising rates too high could create problems in the housing market. With this weeks decision coming a week before a similar decision by the Federal Reserve, a lot of people are looking at the Bank of Canada for direction in terms of whether we could see a step down from the Fed.

It is expected that the BoC will announce another decrease to 25 bps after inflation fell back to 6.4% from 6.8% in December. 

• US Q4 GDP – 26/01 

The first six months of last year started with two consecutive quarters of negative GDP growth.

The US economy saw a return to positive GDP growth in Q3, of 3.2%, after a late revision from, 2.9% at the end of last year, with personal consumption coming in at 2.3%, a decent improvement on the 2% seen in Q2.

The upward revision came about as a result of a rebound in consumer spending, as well as higher government spending. So, for this week‘s first iteration of Q4 GDP, it seems quite likely that we’ll see a slowdown from the strong performance in Q3. 

Expectations are for a modest drop to 2.5%, although signs in recent months point to consumer spending slowing. Given that, there could be considerable downside risks to that estimate.

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