Corporate earnings season primarily affects the stock market. But how well businesses are doing is a basic component of the economy. And many of the companies reporting are so big that they can provide directionality for broader markets. If you are looking for when or if the US will fall into a recession this year, there are likely a lot of clues in the earnings reports.

Monetary policy is likely to be at least influenced by some of the reports coming out in the coming days. Let’s not forget that the Fed had to scramble to shore up the banking system in the US after several regional banks were forced into bankruptcy over rising interest rates. The large reversal in QT at the time shook up currency markets. The fallout from that will be reported in the coming bank reports.

What’s expected

The earnings season unofficially starts with the release of major banks in the US. Europe sees its corporate reporting pick up in the week after that. Japan is likely to be of particular interest this year after higher wage negotiations and GDP growth. Japanese companies typically report towards the end of the month. Through the course of about four weeks, markets get a complete update of the economy that is more thorough than any of the main economic indicators. And, through that time, there is a rate decision cycle and GDP figures, as well as the usual data.

Banks are once again likely to be a focus for the markets, as they are the most sensitive to interest rate hikes. While this typically means more profits for the banks, what forex traders might be more interested in is loan generation and deposits. As credit conditions tighten and the economy might be on the verge of a recession, typically the amount of loans being given will dry up. High interest rates and increased scrutiny raises the cost of borrowing money. That means people have less to spend, the velocity of money slows down, and there is less liquidity. All of that contributes to a slowing economy.

The main sectors

On the other hand, if the economy is likely to escape a recession, other sectors will see benefits. Retail spending will show sustained increases, with major retailers such as Walmart, Carrefour, Tesco, etc reporting increased profits and falling inventories. Discretionary spending is seen increasing if people feel confident about their personal finances, which can be seen in airline ticket sales.

One of the key elements to focus on is the impact on prices. So far, many companies have reported increasing sales – but the actual volumes have been falling. That is, the improvements in profits that companies see are because of higher inflation, and aren’t real increases in value. Consumers are buying less – just paying more for it. A reversal of that trend would help convince traders and central bankers that inflation is finally coming down and will stay down. That could foreshadow a topping out of interest rates.

The big players

Finally, there are some key names that have the capacity to shift market sentiment, which directly impacts Forex. That includes companies like FedEx, which is a major logistics company. If it reports a slowing in packages being sent, markets interpret that as a slowing of consumer demand, and move towards safe havens. Walmart is in a similar category for the same reason.

Alibaba, because of its major presence in China, is seen as a bellwether for China’s economy. If its earnings underperform, it could lead to worries about the world’s second largest economy, and depress commodity prices. To wind up, Saudi Aramco is not only the largest company in the world, but it can provide valuable insight into how crude prices could fare in the future, which affects the Canadian dollar.

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