US EARLY MORNING: Index futures are flat; megacap earnings are the highlight of the week, as well as PCE/wages data which are released as the Fed is in blackout

SNAPSHOT: Asia-Pac stocks traded higher, but gains were capped amid mass closures for the Lunar New Year holidays. European equities began the week on the front foot, but saw early gains faded. US equity futures are around flat, seeing some downside as European stocks pared gains. Treasury yields are slightly lower, as is the Dollar Index. Crude futures are a touch beneath neutral. 

FED IN BLACKOUT: The Fed is now in its pre-meeting blackout window ahead of the February 1st confab, where money markets price a 25bps rate hike. There are still a couple of data points that will be released in the blackout window that has the potential to influence policymaker’s thinking (the PCE data, along with wage costs data being the two key releases) – accordingly, we will keep a close eye on the Fedwatchers (WSJ's Nick Timiraos and NYT's Jeanna Smialek are the two that the investment community seems to focus on) in wake of these data releases to understand how officials may respond. With the Fed in the quiet period, focus should fall on large cap earnings in the US, while there are still central bank events in G10 that could influence the macro landscape (see our week ahead preview here).

FOCUS ON EARNINGS: Bank of America notes that 14% of S&P 500 companies have published Q4 earnings numbers so far, and they have reported a 1% miss vs a historical 50bps beat post week one. And while it is still early, BofA says corporate guidance is in the 10th percentile historically. The bank notes that this week will be the second busiest of this earnings season, with 25% of earnings due, with 30%+ of Industrials, Tech, and Materials earnings reports due to be published – sectors that are heavily exposed to China. "It may be too early to see China reopening in numbers, but we are listening for whether companies can match the market’s growing optimism on China," it writes. Meanwhile, Morgan Stanley's celebrity strategist Michael Wilson on the weekend reiterated his view that while many investors are still fundamentally bearish and questioning whether negative fundamentals have already been priced into stocks, Morgan Stanley still thinks the path of US earnings will disappoint both consensus expectations and current valuations. Wilson said he welcomed the change in sentiment and positioning over the past few weeks as a necessary condition for the last stage of this bear market to play out, and advised investors "to stay focused on fundamentals and ignore the false signals and misleading reflections in this bear market hall of mirrors," and added that "we find the shift in investor tone supportive of our call for new lows in the S&P 500, which will bring this bear market to a close later this quarter or early in 2Q."

DEBT CEILING: With the US Treasury now taking extraordinary measures to meet its obligations, analysts say the stage is being set for a debt ceiling stand-off between the White House and Capitol Hill in a few months, with the House being controlled by Republicans and the Senate by the Democrats, and that risks the US defaulting on its debt. The Treasury currently has USD 400bln of cash on hand to meet its obligations, and Treasury Secretary Yellen has said that it was unlikely to run out of cash until early June. House Republicans are looking to use the debt ceiling as a negotiating token to compel the administration into accepting its policies, which include budget cuts. While there is much hyperbole from political reporters, Pantheon Macroeconomics, writing from the market's point of view, says its base case in these situations is always the same: "A deal will be done, but the nature of the deal is unknowable, and it will be done at the very last minute," adding that "everyone has a short-term political incentive to see if the other side blinks first, and a positive disincentive to do the blinking." If however, we get to May/June and the situation still is not resolved, many will be looking to the Fed. Last week, NYT noted that while the central bank was not speaking about what it what do in the event of a default ("in part because the mere suggestion they will bail out warring politicians could leave lawmakers with less of an incentive to reach a deal"), it noted that the Fed has a series of options for mitigating the disaster. Still some banks think that even the brinksmanship may be enough for credit rating agencies to downgrade the US credit rating in the months ahead.

DAY AHEAD: It is a quiet start to a busy week, with the only notable stateside release being December’s series of leading indicators. In terms of speakers, the ECB’s omnipresent President Lagarde will deliver (another) set of remarks after the European close, following her numerous speeches from Davos last week, and ECB’s Panetta is also due; the debate is currently whether the central bank will downshift the pace of rate hikes in March, a notion that received much pushback from the hawks last week; the most recent polling from Reuters revealed that the central bank is expected to hike by 50bps in both February and March. There are no Fed speakers as officials enter blackout ahead of the February 1st FOMC meeting, where officials may discuss a downshift in the pace of hikes ahead. See our Calendar for all of today’s main events. Looking ahead to the rest of the week, US PCE and GDP, BoC, Flash PMIs, Aus and NZ CPI are the main highlights, and we provide previews in our week ahead note here. The North American earnings slate will pick-up too, with updates due from the likes of JNJ, MMM, GE, RTX, VZ, MSFT, T, BA, FCX, LRCX, TSLA, IBM, CMCSA, MA, INTC, V, CVX, AXP; our Weekly Earnings Estimates can be accessed here.

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23 Jan 2023 - 09:20- Research Sheet- Source: Newsquawk

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