Key earnings and US data to drive market sentiment in February

The Fed remains cautious on interest rate cuts as the data docket continues to mature and strengthen

A trader works on the floor of the New York Stock Exchange. Upbeat fourth-quarter earnings will keep optimism high in US equity markets. Bloomberg

It was an upbeat month for stock markets in January, with US bourses closing out the 31-day period with decent gains.

February seems to have started in the same vein, but market sentiment could shift slightly this month.

Historically, February is a mediocre time for stock markets – but there will be some key events this month that should drive sentiment.

In my previous column, I spoke about upcoming US Federal Reserve action – and this remains the key driver of sentiment and price action in markets.

As widely expected, the Federal Open Market Committee left rates unchanged at its meeting last month, and signalled that it needed to see inflation cool further before considering any rate cuts – effectively negating any chance that the central bank would lower borrowing costs at its meeting in March.

The CME FedWatch tool currently shows there is an 84.5 per cent chance the Fed will hold back from cutting interest rates in March, up from 31.9 per cent a month ago.

The Fed has remained cautious as the US data docket continues to mature and provide key updates.

Last Friday, the US non-farm payrolls report for January showed the economy added 353,000 new jobs, well above expectations of 187,000.

Average hourly earnings, a metric to gauge inflation, also came in slightly higher at 4.5 per cent, compared with expectations of 4.1 per cent. The overall US unemployment rate was unchanged at 3.7 per cent.

The strong jobs report will have the Fed on guard, as a hotter-than-expected labour market tends to add to upward price pressures – more people employed means more consumer spending, which ultimately yields higher inflation.

The US Consumer Price Index report, due out on February 13, will be our next big clue.

Current expectations have annual CPI coming in at between 3.2 per cent and 3.6 per cent, with a previous reading of 3.4 per cent.

We would need to see a substantial fall below 3.4 per cent to change the Fed’s view.

During last week’s FOMC meeting, Fed chairman Jerome Powell noted future cuts would not be appropriate until “we have greater confidence that inflation is moving towards the central bank’s 2 per cent target”.

While I am seeing true inflation in the US probably at its lowest level in a year, I would need to see more easing of prices in housing and transportation for the Fed to start cutting rates.

Numerous Fed officials are expected to also speak this week – and their comments will be closely parsed.

Data for retail sales, another key metric of inflation, will be released on February 15 at 5.30pm UAE time. Shortly after, at 6.15pm, US industrial and manufacturing production figures will also be released.

I expect currencies to trade weaker against the US dollar over the next two weeks – EUR/USD looks good to test at 1.0650 levels this month, while GBP/USD should make a run for 1.23 levels in the weeks ahead.

Gold will also come under pressure this month, with a move towards $2,000 expected, where strong support should kick in.

Finally, fourth-quarter earnings season is set to continue this month.

Last week, we saw Facebook and Amazon smash earnings expectations with very impressive forward guidance.

We would need to see this positive trend to continue for the remaining reporting companies to keep optimism high in US equity markets.

On Wednesday, Walt Disney will report its earnings and we await Coca-Cola, Shopify and Airbnb's results next week.

Retailers will take over the spotlight in the second half of the month, with companies such as Walmart, Home Depot, Target and Lowe’s Home Improvement all announcing earnings.

The darling of the markets, chip maker Nvidia, will announce its fourth-quarter results on February 21.

All things considered, perhaps it’s a bit premature to execute longer-term positions in the current climate.

If US data remains uneven and lacks conviction by the Fed, we could see a mini correction, which may be the point for investors to enter.

In the short term, however, the uncertainty and fourth-quarter earnings will provide more than enough opportunities for day traders.

Gaurav Kashyap is a risk manager at Equiti Securities Currencies Brokers. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti Securities Currencies Brokers