Week Ahead: BoE rate decision, earnings roll on & nonfarm payrolls

A busy week is ahead of us as the Bank of England meets for the first time this year amid speculation around negative rates and criticism of its QE programme. Earnings season continues, led by Amazon and Alphabet, and January nonfarm payrolls are released, following December’s decline.

BoE statement: negative rates on their way?

The Bank of England meets this week for its first interest rate decision of 2021, with the question of negative rates floating in the air.

While interest rates are at a record low 0.1%, the dip into the negative is being explored by an ongoing review. In October 2020, the BoE began canvassing banks to assess if they were ready for negative rates, although around that time Governor Andrew Bailey explicitly said no rate change would be coming in the immediate future.

External member Silvana Tenreyro made an impassioned defence of negative rates earlier in January 2021, although internal members are yet to be moved. They may be waiting for the results of their bank-consulting review before making any form of announcement.

Elsewhere, the Bank’s QE programme has been called into question by its own internal independent watchdog The Independent Evaluation Office. According to the IEO’s findings, the BoE “does not understand its own quantitative easing programme”.

According to a report by the Financial Times, quoting the IOE, says the BoE’s QE programme has worked operationally but caused controversy because the central bank’s “important knowledge gaps” hinder its ability to build “public understanding and trust in QE”.

The Bank of England turned to QE last year as a way of giving monetary support to the Covid-hit economy. It has been printing money and buying government bonds in financial markets, in hopes it can keep inflation around its benchmark 2.0% rate.

No changes are expected to the benchmark lending rate nor to the size of scope of QE this week, however there will be close inspection of language and tone around negative rates in light of the deterioration in some economic indicators since the last meeting. The Bank will also likely flag concerns about the path of recovery and the requirement to maintain flexibility. Hints about possible moves into negative rates would likely weight on sterling.

Earnings Season rolls on with Amazon & Alphabet reporting

It’s still earnings season on Wall Street and the reports from the large caps keep rolling in. Some are more likely to prosper from the Covid situation than others and Amazon is well placed to report a bumper quarterly earnings report.

For starters, the holiday shopping season, and a delayed Prime Day fall squarely into the latest quarter. Reports indicate that Amazon may have been able to scoop up as much as 42 cents on the dollar for each sale.

With Prime Day sales alone growing 45.2% year-on-year, with a record-setting $10.4bn, it appears Amazon has been able to capitalise on lockdown as shoppers can really only browse, click and buy instead of hitting the high street. Amazon also reported Cyber Monday was its best ever shopping day, with sales on that 24-hour period clocking in at $9.2bn.

Amazon stocks have outperformed the S&P 500 at +74.5% vs. +17.9% over the past year, thanks in part due to its better Prime delivery service, the lockdown benefiting online retailers, and growth in its Amazon Web Services decision.

Big Tech has performed well under lockdown too, and analysts forecast that Google-parent Alphabet will post a bumper Q4 earnings report next week too.

Ad revenues are expected to be the key driver here, with search ad revenues up 9% in Q3, following an 8% drop in Q2 revenues as businesses adjusted to the Covid reality. For comparison, we can look at Microsoft’s latest search ad revenues contributed $2.18bn in the last quarter, up 1%.

Given Google’s stronghold on that market sector, it’s expected these will be much greater, and could potentially post some substantial gains – especially as YouTube engagement rose higher in the last quarter. Could the trend continue?

See the bottom of this article for a look at which large caps are reporting earnings this week.

Nonfarm payrolls release following December decline

Latest nonfarm payroll data is set to be released next week as an indicator of US economic health.

The job market took a hit in December, when the last release revealed 140,000 jobs had left the economy that month. Weekly unemployment claims hit 965,000 at the start of January, suggesting that the US economy was starting to creak again.

The latest Fed meeting was what we thought it would be, i.e. no major changes to current economic policy. But President Biden is now in the White House and has promised a $1.9 stimulus package that could help get things working again. Part of Biden’s plan is small business protection – something 82% of Americans want from any further stimulus deals according to a Morning Consult poll.

If the stimulus package is passed, then $15bn in grants will be offered to small business employers alongside $35bn in low-interest loans. The Paycheck Protection Programme will likely continue too. Stimulus cheques are said to be coming too, putting $1,400 into consumers’ pockets, which is hoped they will then spend, and reinvigorate business nationwide.

Time is of the essence here though, as 57% of US small business owners think they’ll only be able to last until June. After that, all bets are off as small businesses are already burning through cash at a rate of knots. If the package can get passed, great. If not, further job losses could accrue as businesses fold.

Major Economic Data 

Key Earnings Data