This week is gearing up to be a busy one with events that have the potential to move markets in a big way. Earnings season crescendos, the Fed meets, and the monthly U.S. jobs report will be released.
For at least the next three weeks, the government has found some relief. President Trump announced on Friday that a deal had been reached to reopen the government until February 15. The shutdown was the longest in history running 35 days.
"Both financial and psychological tolls have been taken. There are people and all sizes of businesses and other entities reliant on government workers and federal funding hurt because of a political spat. Some of those dollars, both income and sales, will never be recovered,” Mark Hamrick, Bankrate.com’s senior economic analyst told Yahoo Finance.
And uncertainty remains high.
“This has been another case of self-inflicted uncertainty injected into the environment, serving to potentially undermine consumer and business confidence, coming at a time when the economic expansion is about a decade-old. That makes it more difficult for everyone - consumers, business leaders, the Federal Reserve and others - to make solid judgements about the risks and opportunities for the future.”
Trade tensions between the U.S. and China and fears of an economic slowdown have kept investors on edge. After weeks of conflicting messages from White House officials, Chinese Vice Premier Liu He will be visiting Washington on January 30 for two days of trade negotiations with his American counterparts. If a trade deal is not reached by the March 1 deadline, the U.S. tariffs on Chinese goods will increase from 10% to 25%.
The Federal Open Market Committee (FOMC) will be meeting January 29 for two days. At the conclusion of the meeting on Wednesday, the Fed will hold a press conference to announce whether or not they will be raising short-term interest rates. Economists generally seem to believe that the Fed will remain “patient” at the upcoming meeting.
“At next week’s policy meeting, the Fed is likely to reiterate its current mantra that it can be ‘patient’ in waiting to hike interest rates,” Capital Economics wrote in a note on Friday. Despite the government reopening, much of the key economic data that was to be released over the past two months has still yet to be released, and it is still unclear when and if that data will be released. “Admittedly, stock markets have recovered most of the losses from December and credit spreads have narrowed again, suggesting that fears of an imminent US recession have eased. But the ongoing government shutdown and the continuing weakness in the incoming global economic data are good reasons to stick with the more cautious stance,” the research firm said.
Despite the lack of economic data during the shutdown, Barclays believes that the Fed will still describe the U.S. economy as healthy. “Although we see little reason for the Fed to alter its characterization of labor markets, household spending, and business investment, we believe the committee will choose to describe overall economic activity as growing at a ‘solid’ pace as opposed to ‘strong,’” the firm wrote in a note on Thursday.
January’s jobs report is due to be released Friday, February 1 at 8:30 a.m. ET. The 800,000 federal workers that were furloughed during the shutdown will be counted as employed in the Bureau of Labor Statistics’ payroll survey. “Four million private-sector jobs are estimated to be dependent on federal contracts, so there may be an indirect hit to private payrolls from the shutdown. But most private contractors were probably still paid during the survey period and, since the nine government departments shuttered only cover 11% of total contract spending, the number of private contractors affected is probably closer to 400,000,” according to Capital Economics.
Next week is the busiest week for earnings season. 25% of the S&P 500 and almost half of the Dow components will be releasing their quarterly earnings reports. Three of the four biggest stocks in the world are reporting - Microsoft, Amazon and Apple. Investors will be paying extremely close attention to Apple’s results after the tech behemoth slashed its revenue guidance citing concerns over its iPhone sales in China.
According to Morgan Stanley, “Positive sentiment on Apple has waned as multiple iPhone build cuts and negative press around macro and geopolitical headwinds have re-rated shares to their lowest point since June 2017. While short-term oriented investors are focused on March quarter guidance being a risk to owning shares, more long-term oriented investors are rethinking their valuation framework to embed a worst case scenario of iPhone replacement cycles.”