After a volatile week of trading in markets last week, investors will be anxiously awaiting fresh commentary from the Federal Reserve and major corporate earnings results from tech giants Microsoft and Apple.
The Federal Reserve's January monetary policy meeting is set to begin Tuesday, with a new monetary statement and press conference with Fed Chair Jerome Powell to follow on Wednesday.
This month's meeting is expected to produce virtually no immediate changes to monetary policy, but will set the groundwork for an initial interest rate hike in two months, many market participants expect.
"I think at this point, it's very clear that the first rate hike will be at the March meeting. So I think as we look at the January meeting — which is likely to produce very little or zero, quite frankly, in policy terms — what investors and what we're going to be looking at is really just the language around inflation," Jason Ware, Albion Financial Group Partner, told Yahoo Finance Live last week. "At the end of the day, inflation is what's driving Fed policy at least over the medium term."
"They feel like they've checked the box on their full employment mandate. I think we largely agree with that assessment. But inflation is the big question for 2022," he added. "And if we start to see disinflation as we work through this year — which is our base case view — that might give the Fed a little bit more cover to not raise rates, as the market's now saying, about four times. We think it might be more like two or three times if we do see that disinflation take hold."
The Fed's last monetary statement from December signaled the central bank was inclined to pick up the pace of its asset-purchase tapering process and prepare for an initial interest rate hike, bringing benchmark rates above their current near-zero levels. Shifts on both of these policies would mean removing key accommodative tools that had helped support the virus-stricken U.S. economy — and propped up asset prices — over the course of the pandemic.
The Fed's projections from December suggested that central bank officials would raise interest rates three times this year. But in the weeks since, much of the economic data has made the case for a more aggressively hawkish positioning from the Fed: Consumer prices have risen by the most in 40 years, and the unemployment rate improved far more than expected to reach a fresh pandemic-era low at the end of 2021 as labor market conditions tightened further.
Against this backdrop, even typically "dovish" members of the Federal Reserve have signaled they saw the case for hastening the timing of liftoff on interest rates. Fed Governor Lael Brainard told the Senate Banking Committee during her nomination hearing to become Fed Vice Chair earlier this month that the Fed would likely "be in a position [to raise rates] as soon as asset purchases are terminated," with the end of the asset-purchase tapering program currently on track to end in March.
"The January FOMC meeting should continue the Fed's hawkish policy pivot by signaling that it will soon be appropriate to begin removing accommodation," Deutsche Bank chief U.S. economist Matthew Luzzetti wrote in a note on Friday. "On the policy rate, the meeting statement and Chair Powell's press conference should confirm that liftoff is likely in March. Though Powell may hint that the median expectation for three rate hikes this year (December SEP) has edged higher, it will be difficult to signal more tightening relative to current market pricing of a little over four hikes."
Moreover, the Fed's January statement and press conference could provide more information about the central bank's other tightening tool, or its balance sheet, Luzzetti added. The Fed's December meeting minutes showed some central bank officials thought it would soon be appropriate to begin rolling assets off the Fed's balance sheet, which currently stands at nearly $9 trillion. This suggestion at quantitative tightening (QT) and removing liquidity from the financial system sent markets into a tailspin earlier this month.
"At this point, the Fed has provided little clarity about the specific parameters of quantitative tightening (QT), other than it will be earlier and faster than the last time," Luzzetti said. "While it is likely too early to provide precise details in these areas, Powell could begin to socialize some of the possible ranges of outcomes to the market, in order to anchor expectations."
Earnings season rolls on
Quarterly earnings season is set to ramp up this week, offering another potential catalyst for the names reporting and for the broader markets, as investors monitor profit growth at some of the biggest corporations and index components.
For Microsoft, the report will come following news of the company's biggest-ever acquisition last week, with the tech juggernaut purchasing video game-maker Activision Blizzard (ATVI) for about $69 billion in cash. The move is set to make Microsoft the third-largest gaming company in the world by revenue, after Tencent and Sony. And as CEO Satya Nadella said in the press statement announcing the deal, it would also help lay the foundation for Microsoft to begin developing in the metaverse.
For Microsoft's latest quarterly results, however, growth in its cloud computing Azure platform will remain the key focus. In Microsoft's last quarter, Azure grew by another impressive 50% on a year-over-year basis, though Wall Street expects this to slow slightly to about 46% growth for the fiscal second quarter, according to Jefferies analyst Brent Thill. A broader deceleration may also be included in Microsoft's guidance, given the strength in demand Microsoft and other tech giants experienced over the course of the pandemic.
"Comps get hard as it moves through the year," Thill said in a note last week. Microsoft's revenue grew 22% in the fiscal first quarter, "and that will be hard to sustain as it approaches a $200B+ rev base," Thill added.
Peer tech giant Apple is also set to report results, offering a look at how the company navigated supply chain challenges to meet demand for its newest hardware including the iPhone 13.
Consensus analysts expect Apple grew revenue 7% over last year in its fiscal first quarter that ended in December, to bring sales to a quarterly record of $119.3 billion. Still, that growth rate would mark a significant deceleration from the 21% growth posted in the same quarter last year, and the 29% increase from Apple's quarter ended in September.
Supply chain snarls and chip shortages had been a key concern weighing on Apple at the end of last year, driving the company to slash its iPhone 13 production targets for last year by millions of units, Bloomberg reported in October last year. The company also reportedly told suppliers that iPhone 13 demand had weakened leading up to the holidays, according to a separate Bloomberg report from December. And Apple Chief Financial Officer Luca Maestri had said in late October that the company would likely see a more than $6 billion revenue hit due to supply chain constraints for its December quarter.
Still, some Wall Street analysts struck an upbeat tone on Apple's prospects after a difficult second half of 2021.
"Our checks indicated the supply chain improved on a month-over-month basis throughout the quarter," UBS analyst David Voigt wrote in a note last week. "In addition, our analysis of global availability/wait times suggests the mix continues to skew towards higher-end models like the Pro and Max as consumers appear increasingly likely to spend upwards of $1,000 on an iPhone given significant subsidies available in key markets like the U.S."
"Although we expect iPhone upside in the quarter, lingering supply chain disruptions have likely pushed some sell-through into the March quarter," he added.
Monday: Chicago Fed National Activity Index, December (0.37 in November); Markit U.S. Manufacturing PMI, January preliminary (56.8 expected, 57.7 in December); Markit U.S. Services PMI, January preliminary (54.8 expected, 57.6. in December); Markit. U.S. Composite PMI, January preliminary (57.0 in December)
Tuesday: FHFA House Price Index, month-over-month, November (1.1%. expected, 1.1% in October); S&P CoreLogic Case-Shiller 20-City Composite Index, month-over-month, November (0.98% expected, 0.92% in October); S&P CoreLogic Case-Shiller 20-City Composite Index, year-over-year, November (18.40% expected, 18.41% in October); Conference Board Consumer Confidence, January (112.0 expected, 115.8 in December); Richmond Fed Manufacturing Index, January (14 expected, 16 in December)
Wednesday: MBA Mortgage Applications, week ended January 21 (2.3% during prior week); Advance Goods Trade Balance, December (-$95.8 billion expected, -98.0 billion in November); Wholesale Inventories, month-over-month, December preliminary (1.3% expected, 1.4% in November); New home sales, December (765,000 expected, 744,000 in November); Federal Reserve Monetary Policy Decision
Thursday: Initial jobless claims, January 22 (258,000 expected, 286,000 during prior week); Continuing claims, week ended January 15 (1.635 million during prior week); Durable goods. orders, December preliminary (-0.5% expected, 2.6% in November); Non-defense capital goods orders excluding aircraft (0.2% expected, 0.0% in November); Non-defense capital goods shipments excluding aircraft (0.2% expected, 0.3% in November); GDP annualized, quarter-over-quarter, 4Q first estimate (5.3% expected, 2.3% in 3Q); Personal consumption, 4Q first estimate (3.4% expected, 2.0% in 3Q); Core PCE, quarter-over-quarter, 4Q first estimate (4.8% expected, 4.6% in 3Q); Pending home sales, month-over-month, December (-0.3% expected, -2.2% in November); Kansas City Fed Manufacturing Activity Index, January (24 in December)
Friday: Personal income, December (0.5% expected, 0.4% in November); Personal spending, December (-0.5% expected, 0.6% in November); PCE Deflator, month-over-month, December (0.4% expected, 0.6% in November); PCE Deflator, year-over-year, December (5.8% expected, 5.7% in November); PCE core deflator, month-over-month, December (0.5% expected, 0.5% in November); PCE core deflator, year-over-year, December (4.8% expected, 4.7% in November); University of Michigan sentiment, January final (73.2 in prior print)
Tuesday: General Electric (GE), Polaris (PII), Raytheon Technologies (RTX), 3M (MMM), Lockheed Martin (LMT), Johnson & Johnson (JNJ), American Express (AXP), Verizon (VZ), Invesco (IVZ); Texas Instruments (TXN), Microsoft (MSFT), Capital One Financial Corp. (COF) after market close
Wednesday: AT&T (T), Boeing (BA), The Progressive Corp. (PGR), General Dynamics Corp. (GD), Abbott Laboratories (ABT), Stifel Financial Corp. (SF), Anthem Inc. (ANTM), Nasdaq Inc. (NDAQ), Kimberly-Clark Corp. (KMB) before market open; ServiceNow Inc. (NOW), Qualtrics International (XM), Tesla (TSLA), Intel (INTC), Las Vegas Sands Corp. (LVS), Whirlpool Corp. (WHR), Xilinx (XLNX) after market close
Thursday: Dow Inc. (DOW), Southwest Airlines (LUV), Valero Energy Corp. (VLO), Comcast Corp. (CMCSA), T Rowe Price Group (TROW), Mastercard (MA), Danaher Corp. (DHR), Tractor Supply Corp. (TSCO), Sherwin-Williams (SHW), McDonald's (MCD), Blackstone (BX), McCormick & Co. (MKC), Alaska Air Group (ALK) before market open; HCA Healthcare (HCA), JetBlue Airways (JBLU), Altria Group (MO) before open; Apple (AAPL), Robinhood (HOOD), Visa (V), Juniper Networks (JNP), United States Steel Corp. (X), Western Digital Corp. (WDC), Nucor Corp. (NUE), Mondelez International (MDLZ) after market close
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck