Break it or make it week: Fed, earnings, OPEC

Investors have a full plate this week that includes the US Federal Reserve's latest policy decision and a slew of big-name corporate earnings. Wall Street widely expects the Fed to deliver a 25-basis point interest rate hike at the end of its two-day policy meeting on January 31-February 1 (Tuesday-Wednesday).

Economy

This expectation was further cemented on Friday by another monthly decline in the PCE Prices Index. The headline rate for December slowed to a year-over-year rate of +5.0% from +5.5% in November while the "core" rate (excludes food and energy) came in at +4.4% versus +4.7% previously.

This marked the third straight monthly slowdown in the "core" rate, which is one of the Fed's preferred inflation gauges. The rate is still more than double the Fed's preferred inflation rate of +2% but it has also slowed from +5.2% as recently as September 2022 and is now the slowest pace since October 2021.

Bulls believe the latest PCE slowdown, combined with other data showing slower economic growth and a pullback in both corporate hiring and consumer spending justify a policy adjustment by the Fed.

Expectations

Many bulls are hoping the Fed on Wednesday will signal one final 25-basis point interest rate hike at the March 21-22 meeting before pausing in order to let the tighter financial conditions filter through the system.

Bears doubt the Fed is ready pause just yet considering how tight the labor market remains and the fact that inflation is still too high. The employment picture has moderated in recent months but demand for workers remains high. We will get an update on the labor market on Wednesday from the Job Openings and Labor Turnover Survey (JOLTS). The survey for November showed US employers had 10.46 million open jobs, down only slightly from October.

The January jobs report isn't due out until Friday, after the Fed's policy meeting. December's data showed the labor market added a healthy +223,000 jobs.

Data to watch

The only data today is the Dallas Fed Manufacturing Survey.

Turning to earnings, big tech is in the spotlight this week with Meta reporting on Wednesday, followed by Google-parent company Alphabet, Amazon, and Apple on Thursday. In total, over 100 S&P 500 companies are scheduled to report Q4 results this week.

Today's highlights are Canon, Franklin Resources, GE HealthCare Technologies, NXP Semiconductors, and Whirlpool.

Oil market

Traders this week are also braced for potential volatility in oil and other energy markets ahead of two key events.

On Wednesday, February 1, the OPEC+ Joint Ministerial Monitoring Committee (JMMC) is scheduled to meet. The JMMC does not have authority to set production targets or other policy but they do wield a lot of influence over those decision.

JMMC officials have stressed that they will not be making any recommendations at this meeting but OPEC energy ministers often make comments to the press on the sidelines that can provide clues as to how the officials might be leaning.

Many oil insiders believe OPEC needs to lift production in order to meet expected China demand as the world's biggest oil consumer rebounds from Covid.

A little further out on February 5, a ban by the EU on seaborne imports of Russian refined oil products - which includes diesel - will go into effect. It is also working with the G-7 to impose a price cap for countries outside the G-7. Some oil insiders are concerned the EU ban will put further strain on tight global diesel supplies and possibly send prices rocketing higher.

In the US, distillate stockpiles, which include diesel, are -20% below the five-year average, according to the latest US Energy Information Administration inventory report. However, some insiders believe new refining capacity coming online in the Middle East will be able to fill the gaps left by Russia.