Corporate Results, Fed and Inflation Are Still Key Drivers | Daily Market Analysis

Key events:

• Eurozone - ZEW Economic Sentiment (Oct)
• US - Industrial Production (MoM) (Sep)
• Eurozone - ECB's Schnabel Speaks

The US earnings season will begin amid fears that the Fed's aggressive rate hike campaign could send the economy into recession. Investors will get an update on the state of the US housing market, where higher borrowing costs have already cooled demand. Also on the agenda are speeches from several Fed officials. In the UK, Jeremy Hunt will begin his first full week as chancellor since Prime Minister Liz Truss was forced to fire her predecessor. Elsewhere, Q3 economic data from China is likely to highlight the problems facing the world's No. 2 economy, and in Japan, the yen will again be in the crosshairs of interventions. Here's what you need to know today.

Earnings season

Q3 earnings reporting season begins as companies report their results amid a challenging environment caused by a stronger dollar and persistently high inflation.

According to Reuters, S&P 500 companies are expected to report overall earnings growth of 6 to 7 percent from a year earlier, which would be the slowest growth since Q4 of 2020.

But more attention may be focused on how CEOs are forecasting the future; the consensus analyst forecast is that corporate earnings will grow nearly 8% next year, according to Refinitiv IBES, but many investors are questioning that forecast as recession risks loom.

The downturn in the market has driven down stock prices, but a worsening earnings outlook could make stocks less attractive. Companies such as Tesla, Netflix, and Johnson & Johnson are expected to report their earnings in this week.

US housing data

After last week's better-than-expected US inflation data, all eyes will be on the housing market with reports on building permits, housing starts, and finished home sales due out.

Home prices fell in July for the first time in more than a decade as rising interest rates hit home demand, while mortgage applications also fell.

The economic calendar also includes reports on industrial production, the Philadelphia Fed manufacturing index, the Empire State manufacturing index, and initial jobless claims.

Regional Fed heads Neal Kashkari, Charles Evans and James Bullard are also scheduled to make statements, which will be closely watched.

Bullard said Saturday that last week's CPI data showed that inflation had become "ruinous," and left open the possibility of a 75 basis point rate hike at the upcoming Fed meetings in November and December, but added that it was too early to draw such conclusions.

The UK is trying to regain its composure

Britain's new finance minister, Jeremy Hunt, said he would rebuild the country's public finances after the original economic plan proposed by Liz Truss and former minister Kwasi Kwarteng confounded the financial market.

Reports that the government is preparing for a major U-turn on the planned tax cuts have helped ease fears about the state's finances, but it will need to translate into concrete plans to avoid a renewed bond sell-off.

Investors will also be watching Wednesday's UK inflation data for September, which is expected to be in double digits amid falling costs of living, while Friday's retail sales data is expected to point to lower consumer spending.

Data from China

China will release its Q3 GDP data on Tuesday, and while growth is expected to rebound from the previous quarter, the economy is still on track for its slowest annual growth rate in nearly 50 years.

Over the 3 months through September, the annual growth rate is expected to increase to 3.4% from 0.4% in Q2.

Tight COVID-19 restrictions along with supply chain disruptions caused by the war in Ukraine, as well as a slowdown in global growth due to a sharp increase in the cost of borrowing to curb inflation have put pressure on the world's second-largest economy.

Analysts expect China's economy to grow by 3.2% in 2022, well below the official target of 5.5%.

Investors will be watching the Communist Party of China's week-long congress, which began Sunday, for any guidance on economic policy.

Yen intervention

Currency traders will keep a close eye on the yen amid speculation that the Bank of Japan may take new steps to strengthen its currency after it intervened in the market last month for the first time since 1998.

Bank of Japan deputy governor Masazumi Wakatabe said recent fluctuations in the yen were "clearly too fast and one-sided," indicating concerns about the possible economic consequences of the yen falling against the dollar to a 32-year low.

Japan intervened in the foreign exchange market in September to halt the yen's sharp fall, which was mainly caused by a divergence in monetary policy between the sharp increase in the US Federal Reserve rate and the Bank of Japan's ultra-soft monetary policy aimed at achieving its 2% inflation target.

The Bank of Japan is an exception among the world's central banks, many of which are raising interest rates to combat red-hot inflation as they focus on supporting a fragile economic recovery.