Back-to-back: Bank of England raises rates again
On the latest edition of Market Week in Review, Investment Strategist Alex Cousley and Research Analyst Laura Bardewyck discussed the latest results from U.S. fourth-quarter earnings season. They also reviewed recent developments from global central banks and assessed newly released data on U.S. manufacturing and services.
Q4 earnings season report card: Growth up 25% at halfway point
Approximately midway through U.S. fourth-quarter earnings season, Cousley said that in general, companies are beating earnings expectations - although not to the degree seen in previous quarters. “At the start of the season, our expectation for year-over-year earnings growth for the fourth quarter of 2021 was 22% - and so far, earnings are up around 25%,” he noted.
Focusing in on the tech sector, Cousley said in the wake of strong reports from Apple and Google last month, the first week of February offered more mixed results. “PayPal and Spotify disappointed on guidance, and Facebook really took a hit after missing on both earnings and guidance, with shares of its parent company, Meta, plunging 26% on 3 February alone,” he remarked. Meanwhile, Amazon reported better-than-expected earnings later that same day, Cousley said, with the company’s stock rising on the news.
“Overall, the tech sector came into this earnings season facing elevated expectations - and some companies have clearly missed in that regard,” he stated, noting the rapid rise in rates since the start of the year has also been a headwind for some of the more expensive names.
BoE hikes rates for second time in a row, ECB turns hawkish
Pivoting to the latest news from central banks, Cousley said the Bank of England (BoE) raised rates for the second consecutive time, announcing a 25-basis-point (bps) increase at its latest meeting. The UK central bank’s key lending rate now stands at 0.5%, following the 3 February hike and a 15-basis-point hike last December, he noted.
“The latest rate increase was approved by a 5-4 decision, with four members of the BoE’s monetary policy committee actually voting to raise rates by 50 bps,” Cousley said, explaining that the vote offers a window into the central bank’s views on combating inflation. The BoE also signalled more rate hikes are likely in the months to come, he stated, with another one possible as early as next month.
“The BoE is in an interesting situation today, because on the one hand, the UK economy is still operating at a level below where it was before the pandemic struck. Some of this is related to COVID-19, but some of this is also due to Brexit and the constraints it's placed on the nation’s labour supply,” Cousley explained. On the other hand, inflation continues to surge to the highest levels in nearly 30 years, he said.
Meanwhile, the European Central Bank (ECB), which also met on 3 February, left its key interest rate unchanged, Cousley said. Importantly, however, ECB President Christine Lagarde’s comments at a follow-up news conference were a little more hawkish in tone, he remarked. “Lagarde stated that inflation risks have clearly moved to the upside - and also notably refrained from repeating what she said last November, which was that a 2022 rate hike was very unlikely,” Cousley noted. In his mind, this opens the door to a potential interest-rate increase by the central bank later in 2022, especially if inflation comes in above expectations.
Turning lastly to the U.S. Federal Reserve (Fed), Cousley said that in the week since its 25-26 January meeting, comments from Fed officials have made it clear the central bank will exercise a data-dependent approach as it shifts toward tightening monetary policy. “Even some of the more hawkish members of the FOMC (Federal Open Market Committee) have indicated over the past few days that any decisions on the magnitude and number of rate hikes in 2022 will be guided by future economic data,” he explained.
U.S. manufacturing, services sectors expanding at slower pace
Speaking of economic data, Cousley said the Institute for Supply Management (ISM)’s U.S. manufacturing PMI (purchasing managers’ index) declined to a level of 57.6 in January - down from 58.8 in December. A reading above 50 indicates expansionary conditions, while a reading below 50 points to contractionary conditions. The latest numbers show the country’s manufacturing sector is still expanding, he said - just at a lower rate.
A similar story appears to be playing out in the U.S. services sector as well, Cousley noted, with the ISM’s services PMI coming in at a reading of 59.9. That number is down from the very high levels observed over several months last fall, but still indicates growth, he said.