Corporate earnings to take centre stage as visibility deteriorates

With earnings season about to kick into high gear, early omens are not looking great with  some of the high-profile US corporate results, particularly those operating in the digital economy already showing weakening trend from slower economic activity. In the coming week, earnings of those tech names reliant on advertising revenues will be in focus and are likely set the tone for near term global stock markets’ direction. Indeed, fears are that potential for poorer results could eventually spill over to weaker spending on cloud infrastructure which has been one key bright spot in the market. 

The pace of US Federal Reserve’s monetary policy tightening will also be closely scrutinised as markets are hoping that this will be the last big interest rate hike as growing likelihood of a recession will pave the way for slower hikes for the rest of the year and possibly lead to lower rates by early next year. However, as we noted last week, with inflationary pressures likely to remain stubbornly high from rents and wages in the near term, we think stagflation is a more likely scenario and we are not as hopeful that weaker commodity prices will persuade the US central bank to pause its aggressive rate hikes in September. 

Looking at our own market in Japan, BOJ’s decision last week to stick with its ultra-loose monetary policy despite raising its inflation outlook has left the central bank increasingly isolated in its assessment that price rises will prove only temporary and its continued aggressive intervention in the JGB market to keep longer term yields close to zero could prove a huge policy error. Although its decision didn’t come as much of a surprise and the yen didn’t come under any immediate selling pressure, Japan’s growing inflationary rate is clearly testing the nerves of the ruling politicians.

Japan government’s most recent decision to replace two of BOJ’s dovish board members with those known to have a more cautious stance towards the central bank’s aggressive balance sheet expansion was an important indication that Japan’s premier, Kishida-san is growing increasingly uneasy about the BOJ governor’s unflinching monetary policy stance that has led to a massive derating of the Japanese currency. With input costs being increasingly passed down the supply chain, we think rising prices will be only adding more pressure on Japan’s central bank to allow longer term rates to be ultimately dictated by market forces. 

But for now, Japanese corporate earnings results are likely to take centre stage with technology components and semiconductor-related names, many of which are reporting this week to be closely watched for clues of how high inventories have climbed and whether weakening end demand for PCs, smartphones and other consumer electronics will offset the benefits of the weaker yen. What is certain is that earnings visibility looks set be deteriorate further as we head deeper into the second half of this year.