Market news today: so far, so good for earnings

MARKETS are edging higher as investors pin their hopes on a Goldilocks scenario in which a historically fast and aggressive interest rate tightening cycle overcomes inflation but without simultaneously breaking the economy.

Another week, another gain

The S&P 500 notched up a third successive week of rising prices last week despite yet another interest rate hike in the US, the 11th in 12 meetings of the Federal Reserve. The US benchmark added 1%, while the Nasdaq index, which is even more sensitive to rising interest rates, due to its high growth stock bias, added almost twice as much, 1.9%.

That suggests that investors now believe we are very close to the top of this interest rate cycle, and they are starting to look forward to easier policy at the end of this year and into 2024. That in turn is underwriting their optimism that this year’s fall in company earnings will be modest and followed by a decent bounce in profits next year. All eyes will this week be on Apple and Amazon, two of the tech giants that have driven markets higher in recent months, both of which report on Thursday.

All of which justifies the rally in stock markets since last autumn’s low point, and the rise in valuation multiples that have driven the recovery - from about 15 times expected earnings to 20 or so. This, of course, is what markets do. They anticipate recovery, moving ahead of improvements in the real economy, which is why timing the market is so difficult. You have to be positive on shares even while the headlines remain gloomy.

Meanwhile in Japan

It’s not so much turning Japanese as Japan turning. This week the normally staid Bank of Japan dropped a bombshell on global markets. It said that it would be lifting the cap it has imposed on bond yields in Japan to 1% from half that level, in a significant reduction in its long-running support for the Japanese economy.

It’s a technical detail that many investors over here will not have noticed but it could have a big impact on global markets. That’s because, after 30 years of fretting about deflation, or falling prices, Japan is now battling with an inflation rate of 3.3%, which is higher than in the US for the first time in many years. While Japan is still the only country in the world with negative interest rates, that could change soon. And with it the need for Japanese investors to park their money in overseas markets to earn an acceptable return.

If Japanese investors decide they’d rather have their money closer to home now that policy is finally normalising in Japan, that could unsettle global markets.

UK plays catch up

The focus here in the UK this week will be the latest from the Bank of England. The only question for Thursday’s rate-setting decision is whether the next hike is a quarter or half percentage point. With the latest inflation number coming in at 7.9%, the Bank is in a tight spot. Inflation is too high, and higher than elsewhere in the developed world. But it is falling faster than expected. Meanwhile, sharply higher mortgage rates are squeezing our housing-led economy hard. Setting policy against that backdrop will not be easy.

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