The Overnight Report: BoJ Anticipation

By Rudi Filapek-Vandyck

The Dow Jones Industrial Average posted its largest fall in three weeks overnight. But before anyone starts panicking, the S&P500's loss hardly registers and the Nasdaq managed a small gain.

The divergence between America's major indices is the result of what appears to become a divergent quarterly reporting season. There's also still a divergence in macro-drivers as China re-opening and US bond yields continue to play their part.

For Chinese demand, look no further than overnight moves in energy prices. For US bond yields (traders reducing implied forecasts for Fed tightening this year) see Nasdaq's outperformance.

While traders are anxiously awaiting the outcome and post-meeting communication by the BoJ later today, a survey by Bloomberg suggested economists are anticipating the ECB will soon slow the pace of further tightening.

With attention pinned on Japan today, economists at National Australia Bank reminded investors it was only in December the BoJ surprised the market by announcing a widening of its yield curve control band from -/+ 0.25% to -/+0.5%.

Most of the action overnight occurred in European government bonds, with FX and equities relatively quiet. European gas prices rallied 8.3% on bargain hunting and worsening weather conditions.

Speaking to billionaires among others in Davos, China Vice Premier Liu reportedly said the Chinese economy will likely rebound to its pre-pandemic growth trend this year after coronavirus infections passed their peak. Beijing's focus this year will be on boosting domestic demand, which will lead to a notable increase in imports, Liu said.

Turning to the US corporate results season, Morgan Stanley's (NYSE:MS) market update was rewarded positively (+ 5.84%) as the fund management business surprised to the upside, but Goldman Sachs' (NYSE:GS) market update disappointed and this was reflected in a -6.45% share price fall, after initially sinking -9%. Insurer Travelers (NYSE:TRV) Cos disappointed too.

What you hear in the background is a chorus of less enthusiastic market commentators and investment experts repeating their mantra that earnings forecasts remain too high for US companies for the year ahead. Is the reckoning planned for the current reporting season?

Prior to last night's corporate reports, S&P reported its consensus estimate puts EPS growth for the fourth quarter at -2.31% compared with -2.05% a month earlier. Underneath the general average, the underlying trend for financials is improving, with materials and energy companies also enjoying slight improvement following reductions to forecasts.

Analysts are nevertheless observing early reports have thus far failed to instill a lot of enthusiasm in the market, with Fed policy and China the biggest drivers for the positive opening into 2023 so far.

Tonight, the US releases December retail sales with the headline print seen at -0.9% (from -0.6% prior) likely hit hard by the fall in gas prices and drop in auto sales. Sales ex-autos are expected to fall by -0.5%, extending the -0.2% decline from the previous month, if market consensus proves accurate.

Industrial production (Dec -0.1% mom exp vs -0.2% prev.) and inventories are also out tonight alongside the NAHB Homebuilders survey. Early tomorrow morning the Fed publishes a new edition of its Beige book, likely to reveal further evidence of slowing growth combined with inflation pressures easing.

On the calendar locally today investors are looking forward to market updates by Allkem Ltd (ASX:AKE), Ampol Ltd (ASX:ALD) and Telix Pharmaceuticals Ltd (ASX:TLX). Early indications from retailers JB Hi-Fi Ltd (ASX:JBH), Super Retail Group Ltd (ASX:SUL) and Baby Bunting Group Ltd (ASX:BBN) suggest polarisation in business conditions remains alive and well in Australia too.

The share price in JB Hi-Fi could not hold on to its early gain yesterday amidst calls for a peak in earnings. This suggests February might yet again be less straightforward than usual, though it's early days still.

Judging from SPI futures, local equities might be looking for direction today, as they largely did yesterday (at the index level).

"The Overnight Report: BoJ Anticipation" was originally published on FNArena.com.au and was republished with permission.