Top 5 things to watch in the markets in the week ahead

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Author: Noreen Burke — US inflation data and the start of corporate earnings season will be the main highlights of an otherwise quiet week on the economic calendar. Inflation data for December will help influence the size of the Federal Reserve’s next rate hike, while corporate earnings will provide important insight into the health of the economy amid concerns about a potential slowdown. UK GDP, Japanese inflation and Eurozone data will also be in focus. Here’s what you need to know to start your week.

  1. US CPI

The US consumer price index for December is due to be released on Thursday, and economists expect core inflation to rise from a year earlier. Any sign that price pressures continue to ease could not only reinforce the view that the Fed is nearing the end of its most aggressive tightening cycle in decades, but could also fuel speculation that a rate cut could come later this year.

U.S. data on Friday showed December payrolls rose more than expected even as wage gains slowed and service activity contracted, easing concerns about the Fed’s monetary policy.

Fed officials on Friday acknowledged cooling wage growth and other signs of a gradual economic slowdown, with Atlanta President Rafael Bostick hinting at a chance for a quarter percentage point hike at the Fed’s next Jan. 31-Feb. 1 policy meeting. That raised rates by 50 basis points in December.

  1. Earnings season is underway

Companies are set to begin reporting fourth-quarter earnings next week, and investors are looking for signs of a potential economic slowdown that will trickle down to the bottom line.

Bank statements are due only on Friday Wells Fargo (THEY ARE NOT:), Citigroup ( NISE: ), Bank of America ( NISE: ) and JPMorgan ( NISE: ), healthcare titan UnitedHealth Group ( NISE: ), asset manager BlackRock ( NISE: ) and Delta Air Lines ( NISE: ).

Consensus analyst estimates call for a 1.6% decline in Q4 earnings from a year ago, according to Refinitiv IBES. Some believe that projections for 2023 are still too rosy given the risks of a recession.

The stock may be more expensive than it appears if current earnings estimates don’t fully factor in any economic slowdown, while any decline could further reduce what investors are willing to pay for the stock.

  1. UK GDP

Britain will release data for November on Friday amid a historic fall in the cost of living amid double-digit inflation, traffic and public sector strikes and a softening housing market as the country faces what is likely to be a protracted recession.

After nine consecutive interest rate hikes by the Bank of England and more to come, UK mortgage approvals in November hit their lowest level since a pandemic-induced slump in June 2020, recent data showed.

As price pressures and higher borrowing costs bite, Prime Minister Rishi Sunak has promised to halve inflation, grow the economy, reduce public debt and reduce waiting lists for health services.

But analysts at Deutsche Bank believe high inflation will continue this year, no rate cut until 2024 and fiscal policy will tighten, while analysts at Barclays expect the UK economy to continue shrinking until the end of the third quarter of 2023.

  1. Eurozone data

On Friday, Germany will release an estimate that will show the impact of the energy crisis caused by Russia’s war in Ukraine on the eurozone’s largest economy.

The wider eurozone is due to release data on the same day. High energy import costs have tipped the bloc’s trade balance from surplus to deficit, but the deficit narrowed in October as gas prices eased, and market watchers will be looking to see if this trend continues in November.

Industrial production is forecast to make a small recovery after falling in October.

  1. Tokyo inflation

Market watchers will be keeping a close eye on inflation figures in Tokyo on Tuesday, after last month’s report tipped the market for the first time on a potential policy change by the Bank of Japan.

— which leads the national numbers, often by several weeks — jumped to its highest level in four decades in November.

Less than a month later, the BOJ changed the controls on bond yields that allow long-term interest rates to rise higher, wrong markets. The move was intended to mitigate some of the costs of prolonged monetary stimulus.

The index rallied to seven-month highs on growing expectations for further hawkish change, although BOJ officials claim the move was a one-off. The BOJ is scheduled to hold its next policy meeting on January 18.

— Reuters contributed to this report

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