Earnings to gain focus from Fed this week

The market’s focus will be on fourth-quarter earnings this week. Stronger profit growth for economically sensitive stocks compared to technology players is expected.

The earnings period could test a theory that value and cyclicals are set to outperform tech stocks. It will also be a time when investors get a first-hand look at how companies are dealing with inflation, which rose 7% on an annualized basis during the final month of 2021, as measured by the Consumer Price Index.

The materials sector might see earnings grow by 62% and industrials by 52%. Energy profits are expected to increase sharply since they had negative numbers last year. Consumer discretionary, minus internet retail, is anticipated to have earnings growth of 33.9%, while financials, which also are deemed cyclical stocks, to see profits above just 2%, according to data.

Earnings forecast revisions have also favored cyclical sectors. Earnings growth estimates for the cyclical are up 9.5% since September, but tech sector earnings estimates are down 1.6%.

Several major banks in the earnings season get busier in the week ahead with a range of sectors, such as Goldman Sachs, Travellers, Bank of America, Netflix and consumer brand giant, Procter & Gamble. There are also results coming from transportation companies, including J.B. Hunt Transport Services, United Airlines and Union Pacific.

The Treasury market could be a little quieter in the week ahead, with the markets closed on Monday for Martin Luther King Jr. Day. The 10-year and 30-year auctions are out of the way with the big catalysts that have happened for the near term.

There are a few economic reports on the calendar, including the Fed’s Empire State Manufacturing Survey on Tuesday and the Philadelphia Fed Manufacturing Survey on Thursday. Existing home sales were also reported on Thursday.

China cut key rate

China’s central bank cut the borrowing costs of its medium-term loans for the first time on Monday since April 2020, to cushion any economic slowdown, defying market expectations.

PBOC said it was lowering the interest rate on 700 billion yuan worth of one-year medium-term lending facility loans to some financial institutions by 10 basis points to 2.85% from 2.95% in previous operations.

With 500-billion-yuan worth of MLF loans maturing on Monday, the operation resulted in a net 200 billion yuan of fresh fund injections into the banking system.

The central bank also lowered the borrowing costs of seven-day reverse repurchase agreements, or repos, by the same margin to 2.10% from 2.20%, when it offered another 100-billion-yuan worth of reverse repos into the banking system on the day, compared with 10 billion worth of such short-term liquidity tool due on Monday.