Despite the contraction in GDP in the first and second quarters of 2022, the unemployment rate remained low, indicating that the U.S. economy was not in a recession. Real GDP growth has since picked up and the Fed has raised the target range for the fed funds rate by 75 basis points at four consecutive meetings. There is speculation that the Fed will raise the target range one more time at the December 13–14 FOMC meeting, but the Fed has stated that it will reach a higher terminal rate and hold it there for a while to get inflation under control.
The November jobs report showed higher than expected job growth as nonfarm payrolls increased by 263,000, the unemployment rate held at a 50–year low of 3.7%, and average hourly earnings increased by 0.6%. The market sees this as bad news, thinking it will push out any eventual pivot by the Fed with its monetary policy. This report suggests the market overreacted to what it heard from Fed Chair Powell on Wednesday, and it will bring a test of the S&P 500‘s 200–day moving average (4,046) into play.
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
ISM services
Our forecast predicts that the ISM services will fall from 54.4 in October to 54.0 in November, which would mean a third consecutive monthly decline; however, it would still indicate fairly healthy activity overall in the services sector. In contrast, the ISM manufacturing indicator fell below 50 for the first time since May 2020. The services sector is seeing a return to pre-pandemic consumption rates, while manufacturing still sees surged spending on goods. In our latest BofA report on the USA, Aditya Bhave and Shruti Mishra noted that holiday leisure service spending has been strong, while growth in good consumption has been more modest.
Trade Balance
The October trade deficit is projected to be $80.0b, compared to the previous month of $73.3b. This is based on the advanced goods trade deficit from October which showed a decrease in exports and a small increase in imports, resulting in an overall widening of the gap. While India’s travel and tourism industry has been one of the worst affected by the pandemic, we are seeing some early signs of a recovery. As lockdown restrictions ease and people begin to feel more comfortable traveling again, we expect to see an increase in domestic as well as international travel. Additionally, with vaccine distribution underway across the globe, foreign travelers may once again consider visiting India for leisure or business purposes.
Producer Price Index
In November, the headline Producer Price Index likely rose by 0.1% month-over-month, after October’s 0.2% increase–showing signs of moderating producer price inflation. Energy prices probably fell last month, which is one factor for the anticipated moderation in headline PPI. In contrast, we are expecting PPI food inflation to decelerate from the 0.6% m/m rate in October due to a slowing down of commodity prices but remain positive overall. Also, excluding food and energy items, we predict that PPI will increase by 0.2% m/m, which is an acceleration from prior months’ rates. Lastly, we forecast that PPI ex-food, energy, and trade services will grow at a steady pace of 0.2% m/m.
Global Spotlight
On December 6, South Africa’s parliament will debate an independent panel’s report accusing President Cyril Ramaphosa of misconduct, violating the country’s constitution and his oath of office concerning the cover-up of a $4 million theft from his farm. The assembly must decide whether to adopt the report, which could result in impeachment proceedings. Before the meeting, however, the leadership of the ruling African National Congress will discuss Ramaphosa’s future–it’s possible he may resign before the assembly debates the report if the majority decides against him. If Ramaphosa leaves office, it would trigger a competition within the ANC between its pro-business and populist factions that could last until 2023. This would create enormous uncertainty about South Africa’s political climate and investment environment.
As Netanyahu prepares to finalize his Cabinet in the coming week, a potential Israeli government is beginning to emerge. With deals now clinched with the Religious Zionism party, Netanyahu will have a solid coalition heading into formation. With fewer internal obstacles from the remaining political parties, next week may see the most right-wing government in Israel’s history. The goal of this new government is to weaken the Supreme Court of Israel so that their social and political legislation can survive court challenges, rather than being checked by the Knesset. The prospect has alarmed even pro-Israel voices from outside of the country, including a former head of the Anti-Defamation League. This person said that if this prospect goes through, it will weaken Israeli democracy and Diaspora support for the Jewish state. This right-wing government’s policy priorities also include expanding settlements and Israeli control in the West Bank, and enacting right-wing social policies that could target LGBTQ Israelis, among other things.
The Russian oil price cap will be set at $60 per barrel with a periodic review every two months to ensure it remains 5% below the international average. The mechanism enters effect Dec. 5 and applies to all G-7 and EU countries that trade Russian oil by sea. From a practical standpoint, it will only have a limited impact, as most Russian oil is already traded at around $60 per barrel. This will allow Russia and its customers essentially to ignore the price cap and continue using Western financial services. If oil prices continue to rise, the gap between the price cap and international market rates will increase. This, in turn, may lead Moscow to reduce exports to countries and companies that still wish to adhere to the price cap. Meanwhile, OPEC+ is scheduled to hold a meeting on December 4th regarding their policy moving forward; recent events might prompt further discussion surrounding additional production cuts on top of those agreed upon in October.
Argentina will become the presidency of Mercosur for a period during a Dec. 5-6 summit of member presidents in Montevideo, Uruguay, where the dominant concern will be over Uruguay negotiating to join the Trans-Pacific Partnership outside of Mercosur. In late November, Argentina, Brazil, and Paraguay issued a joint note reminding the government of Uruguay that Mercosur reserves “the right to adopt any measures they deem necessary to defend their interests in the legal and commercial spheres.”Uruguay’s membership in the trading bloc could be suspended during the summit, which would then determine if agreements with Argentina and Brazil will remain in place. If Uruguay is ultimately cut off from the trade alliance, free-trade pacts with other countries within the bloc are likely to stay intact. Not only would this allow Uruguay to form a free trade pact with China, but it could also join the Trans-Pacific Partnership. Furthermore, increasing exports of its primary good–soybeans–would be a huge benefit.
Stratfor.com
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Week’s Numbers
Today, the S&P 500 trades at 17.7x forward twelve-month earnings. The sticking point as we enter 2023 is that the stock market still isn’t “cheap.” In fact, it trades at a slight premium to its 10-year historical average of 17.1x, according to FactSet.
Review Last week’s numbers here.
Earnings
Source I/B/E/S data from Refinitiv
Aggregate Estimates and Revisions
- 22Q3 Y/Y earnings are expected to be 4.4%. Excluding the energy sector, the Y/Y earnings estimate is -3.4%.
- Of the 494 companies in the S&P 500 that have reported earnings to date for 22Q3, 71.1% have reported earnings above analyst estimates. This compares to a long-term average of 66.2% and prior four quarter average of 78.1%.
- During the week of Dec. 5, seven S&P 500 companies are expected to report quarterly earnings.
My View
Growth
I predict that GDP growth will decelerate to 0.2% in 2022 (4Q/4Q) and then slump to -0.9% in 2023 (4Q/4Q ), as the indirect effects of tighter monetary policy and financial conditions chill the economy.
Inflation
I predict that there will be a recession next year and ongoing goods deflation, which should result in disinflation next year. My forecast suggests that headline PCE will grow by 5.9% in 2022 (4Q/4Q) and 3.1% in 2023, and core to 4.9% and 3.1%, respectively; broadly speaking, this ties inflation with the Fed’s 2% mandate by 2024’s end.
Federal Reserve
I predict that there will be 50bp rate hikes in December and February, followed by a 25bp rate hike in March, resulting in a terminal rate of 5.0-5.25%. I believe that the risks associated with our revised FOMC rate path are continuing to increase, and that upcoming reports on CPI inflation and the November employment report will have a significant impact on the Fed’s policy decisions in the near future.
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