Key events to watch in the week ahead: 31 July – 4 August 2023

This week’s overview

This week has seen US equity indices drifting higher in the aftermath of more positive earnings surprises, along with some relief that Federal Reserve (Fed) Chair Jerome Powell has stuck to his usual tone at the recent Federal Open Market Committee (FOMC) meeting. The Fed still kept the door open for another rate hike in September, but given that rate decisions were to be determined on a “meeting-by-meeting” basis, the implied policy flexibility seems to carry a less hawkish tone.

Heading into the new week, here are five key events to watch:

US 2Q earnings season: Caterpillar, Advanced Micro Devices, Starbucks, Apple, Amazon

The US earnings season will continue with notable releases from Caterpillar, Advanced Micro Devices, Starbucks, Apple and Amazon in the upcoming week. Amid low expectations, the US earnings season has been better than feared thus far. Out of the 36% of S&P 500 companies which have released their results, 79% have beaten earnings estimates, compared to the 10-year average outperformance of 73%.

Refinitiv estimates suggest that expectations remain priced for an end to the ‘earnings recession’ for the S&P 500 in the current reporting season, leaving companies’ forward guidance on close watch for some much-needed validation. Key highlights will revolve around earnings from Apple and Amazon, which have both rallied close to 50% year-to-date.

31 July 2023 (Monday, 9.30am SGT): China’s National Bureau of Statistics (NBS) manufacturing and non-manufacturing purchasing managers index (PMI)

China’s official PMI readings have been lacklustre thus far, with the manufacturing sector falling into contraction territory since April this year. Reopening momentum for its non-manufacturing sector has been tapering off quickly as well, coming in below expectations for the past three months.

With China’s economic surprise index at its lowest level since May 2020, the stage may be set for another round of lacklustre read in the upcoming figures, with expectations for its manufacturing PMI to stay subdued at 49.2 versus the previous 49.0. This will likely add to the calls for authorities to do more and while China's leadership has reaffirmed their pledge to support the economy lately, little details were offered thus far on specific measures.

Widening bond yield differentials with the US and a sharp weakening of the yuan may be looked upon as limiting factors for too-aggressive moves. But nevertheless, market participants will seek the point where the worst is over to renew their conviction in Chinese equities.

1 August 2023 (Tuesday, 12.30pm SGT): Reserve Bank of Australia (RBA) interest rate decision

At its July meeting, the RBA has kept its official cash rate on hold at 4.10%, reverting to its previous stance of wanting to assess the impact of the cumulative 400 bp rate hikes over the past fourteen months. The subsequent meeting minutes put the focus firmly on incoming data to guide its next decision.

Given the downside surprise this week in inflation (6% year on year versus 6.2% expected) and retail sales (-0.8% versus 0.0% expected), further wait-and-see are being priced for the upcoming meeting. Broad expectations are that further progress in inflation could provide room for the central bank to look past its still-strong labour market and keep its rates unchanged, at least for now.

3 August 2023 (Thursday, 7.00pm SGT): Bank of England (BoE) interest rate decision

At its previous June meeting, the BoE has raised the bank rate by 50 bp to 5.0% for its thirteenth consecutive rate increase, in response to the persistent showing in inflation in May. That said, inflation numbers for June have finally provided some relief, with a downside surprise of 7.9% year-on-year versus the 8.2% expected. Earlier this week, the composite flash PMI also came in below expectations at 50.7 versus the 52.3 consensus.

Given the current backdrop, a smaller 25 bp rate hike has been fully priced for next week, and there is a non-insignificant chance (25%) of a larger 50 bp rate hike priced in. However, the rates market continues to see further rate hikes ahead, pricing for the BoE’s terminal rate to reach 5.75% before year-end. Much will revolve around the central bank’s tone next week for some validation.

4 August 2023 (Friday, 8.30pm SGT): US July non-farm payrolls

At the latest FOMC meeting, Fed Chair Jerome Powell noted that reducing inflation is still likely to require some softening of labour market conditions, although he does not foresee a significant downturn that results in high levels of job losses.

With that, a more lukewarm job figure next week may likely make the case for the Fed to transit into a prolonged rate pause over coming meetings, while also provides some validation for the ‘Goldilocks’ economy that many are seeking.

Current expectations are for the US labour market to show further cooling next week, potentially adding 184,000 jobs in July, compared to the previous month’s 209,000. Unemployment rate is expected to be held steady at 3.6%, while wage growth is expected to ease slightly to 0.3% month-on-month compared to the 0.4% in June.