A look at the day ahead in U.S. and global markets from Mike Dolan.
Flush with relief that U.S. inflation is indeed falling as fast as markets had hoped, investors now have to work out how the country's biggest lenders are coping with the economic slowdown and higher interest rates keeping prices in check.
Kicking off the fourth-quarter corporate results season in earnest, JPMorgan (NYSE:JPM), Citigroup (NYSE:C), Bank of America (NYSE:BAC), Bank of New York Mellon (NYSE:BK) and Wells Fargo (NYSE:WFC) are among the countries biggest banks updating on Friday.
With news of another sharp drop in annual U.S. inflation last month bringing gains in Wall St stock indices to more than 5% for the first two weeks of the year, fingers are crossed there's no "Friday 13th" surprise in the earnings readouts.
The big banks are expected to report lower Q4 profits as they stockpile rainy-day funds to prepare for an economic slowdown that is battering investment banking. The six largest lenders are forecast to amass a combined $5.7 billion in reserves to prepare for soured loans - double the $2.37 billion set aside a year earlier.
Close attention will also be paid to any further signs of staff cuts after Goldman Sachs (NYSE:GS) and BlackRock (NYSE:BLK) were the latest this week to lay off hundreds of bankers.
Overall, S&P 500 earnings are expected to have fallen 2.2% from a year earlier, the first decline since the pandemic recession in 2020.
It will take some twist to puncture the optimism on peak inflation and peak Federal Reserve interest rates, however. The "fear index", or VIX gauge of U.S. stock volatility, has fallen to its lowest since last April and is now almost half the peaks of last February.
Following the broadly expected December inflation readout, markets now seem almost certain the Fed will downshift its rate hikes further to a quarter point rise next month. Futures markets still see rates topping out below 5% by midyear and pencil in a half point of rate cuts between then and yearend.
Ten-year U.S. Treasury yields fell to their lowest level in a month on Friday, and the dollar continues to bear the brunt of the "peak Fed" narrative -- falling to its lowest since April against the euro and lowest since May against Japan's yen.
The yen surged on speculation the Bank of Japan could revise its ultra-loose monetary policy again at next week's policy meeting. The yield on Japan's benchmark 10-year government bonds breached the central bank's new 0.5% ceiling on Friday, adding pressure for BOJ to either crap or revise its yield cap policy.
While new year optimism about China's reopening is already lifting markets there, the record of the damage is still streaming in with dire December trade numbers. There was better news on the country's tech sector though.
Chinese authorities are set to allow Didi Global's ride-hailing and other apps back on domestic app stores as soon as next week in yet another signal that their two-year regulatory crackdown on the technology sector is ending.
Tesla (NASDAQ:TSLA) shares dropped about 5% before the open after the automaker slashed prices on its electric vehicles in the United States and Europe by as much as 20%, extending a strategy of aggressive discounting after missing Wall Street estimates for 2022 deliveries.
And the so-called crypto winter still appears colder than the real one, with Singapore-based Crypto.com cutting about 20% of its workforce as cryptocurrency exchanges face industry-wide challenges brought on by the collapse of FTX last year.
Diaried events and data releases that may provide direction to U.S. and world markets later on Friday:
* U.S. Dec import/export prices, University of Michigan Jan consumer sentiment
* Minneapolis Federal Reserve President Neel Kashkari, Philadelphia Fed chief Patrick Harker speak. U.S. President Joe Biden meets Japan's Prime Minister Fumio Kishida at White House
* U.S. corporate earnings: BlackRock, JPMorgan, Citigroup, Bank of America, Bank of New York Mellon, Wells Fargo, First Republic Bank (NYSE:FRC), Delta Air Lines (NYSE:DAL), UnitedHealth Group (NYSE:UNH)
(by Mike Dolan; Editing by Alison Williams; mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)