Economic growth is a key indicator of a country’s overall health, and recent data suggests that growth is slowing down. According to our core views, GDP growth slowed down to 1.0% in 2022 (4Q/4Q) and is expected to further decline to -0.8% in 2023 (4Q/4Q) as the lagged effects of tighter monetary policy and financial conditions cool the economy. Tighter monetary policy refers to the Federal Reserve raising interest rates to control inflation and stabilize the economy. This can lead to slower economic growth as borrowing and spending become more expensive. Additionally, financial conditions, such as stock market performance and credit availability, can also impact economic growth.
Inflation is another important economic indicator to consider. Our core views predict that a mild recession this year and ongoing goods deflation should lead to disinflation next year. We expect headline PCE (Personal Consumption Expenditures) to grow 5.6% in 2022 (4Q/4Q) and 2.4% in 2023, and core to grow 4.7% and 2.5%, respectively. PCE is a measure of the prices consumers pay for goods and services, and core PCE excludes volatile food and energy prices. Disinflation refers to a decrease in the rate of inflation, and it is important to note that our forecast still puts inflation broadly in line with the Federal Reserve’s 2% mandate by the end of 2024.
The Federal Reserve, also known as the Fed, is responsible for setting monetary policy and managing interest rates. Our core views predict that we still expect a terminal rate of 5.0-5.25%, but we see the Fed downshifting to a 25bp hike in February, followed by 25bp rate hikes in March and May. A basis point (bp) is a unit of measurement used to express changes in interest rates, and 25bp represents a 0.25% increase. We also think that the Fed can begin to cut its policy rate beginning in March 2024, several months later than we previously forecasted. This means that the Fed may start to lower interest rates to stimulate economic growth.
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
The ISM Services index, an indicator of economic activity in the service sector, is likely to have rebounded to 50.5 in January after a significant decrease in December to 49.2. Although there are indications that activity in the service sector has slowed and the ISM measure also takes into account the construction industry, where the residential sector has been in a recession for some time, we believe that the decrease in December may have exaggerated the slowdown in activity and anticipate a rebound in January.
At the upcoming Federal Open Market Committee (FOMC) meeting in February, we anticipate that the Federal Reserve will increase the target range for the federal funds rate by 25 basis points to 4.50-4.75%. While we previously predicted that the Fed would raise its policy rate by 50 basis points due to a strong December employment report, recent data indicating a broadening of the economic slowdown and further evidence of slowing inflationary pressures have likely led the FOMC to adjust its rate hike plans. The Fed continues to be cautious about the inflation outlook and is uncertain that inflationary pressures will dissipate quickly. We anticipate that the statement will retain the language that “ongoing increases” in the federal funds rate will be appropriate.
We anticipate that the ISM Manufacturing Index decreased from 48.4 in December to 48.0 in January. This would signify the fifth consecutive decline and the third reading below 50. Regional indicators have been released and indicate that manufacturing activity cooled further in January.
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
Review Last week’s numbers here.
Earnings
Source I/B/E/S data from Refinitiv
The 22Q4 Y/Y earnings for the S&P 500 are expected to be -2.9%. However, when the energy sector is excluded from the calculations, the Y/Y earnings estimate drops to -7.1%. This indicates that the energy sector may be providing some support for overall earnings, while other sectors may be struggling.
Of the 143 companies in the S&P 500 that have reported earnings to date for 22Q4, 67.8% have reported earnings above analyst estimates. This is a relatively high percentage, but it is lower than the long-term average of 66.3% and the prior four quarter average of 75.5%. This suggests that while many companies are beating earnings estimates, it is not happening as frequently as it has in the past.
During the week of Jan. 30, 107 S&P 500 companies are expected to report their quarterly earnings. This will provide a more complete picture of the state of corporate earnings for the 22Q4. Investors will be closely watching these reports to see if they align with the current expectations of -2.9% Y/Y earnings growth.
Macro Market
I observed that the US GDP rose by 2.9% on a quarter-over-quarter, seasonally adjusted annual rate (q/q saar) in the fourth quarter of 2021. This solid growth was driven by personal and government spending, which kept the economy in expansion. However, I also noted that some of the surge in inventories during this period may have been unplanned, which could lead to a slowing of manufacturing output in the coming months.
Personal spending was one of the key drivers of GDP growth in the fourth quarter, increasing by 2.3%. This was due to a combination of factors such as low unemployment, rising wages, and historically low interest rates. Government spending also played a role, increasing by 4.1%. This was driven by both federal and state government spending, which helped to boost the economy.
Despite the positive GDP growth in the fourth quarter, I believe that some of the increase in inventories may have been unplanned, which could lead to a slowing of manufacturing output in the coming months as companies work to reduce their stockpiles. In addition, I will keep a close eye on the outlook for inflation, as this could have an impact on the Federal Reserve’s future interest rate policy.
In terms of future monetary policy, I expect to see a 25 basis point rate hike in February. However, I also expect the Fed to remain cautious on the outlook for inflation, as they continue to monitor economic data and assess the impact of their policies. With the US economy showing solid growth, it’s likely that the Fed will continue to take a gradual approach to raising interest rates in order to avoid stalling the recovery.
Global Spotlight
U.S. Secretary of State Anthony Blinken is visiting Egypt, Israel, and the West Bank from Jan. 29-31 to meet with leaders and discuss the recent uptick in violence between Israel and the Palestinian territories. He will call for calm and negotiations between the two governments and his visit will be his first to Israel since the formation of a new right-wing government, which has dimmed the prospects of cooperation over a two-state solution.
NATO Secretary-General Jens Stoltenberg and U.S. Defense Secretary Lloyd Austin will be visiting Japan and South Korea to meet with leaders and discuss security relations. The visits will focus on deepening ties with the West and will fuel China’s fears of Western containment. South Korea is also attempting to increase its presence in the European arms market through recent weapon sales to Poland.
The EU is debating the price level for its cap on Russian oil products before its implementation on Feb. 5. A failure to reach an agreement would result in a ban on shipping companies using EU financial services, including insurance. The EU is considering a $100 per barrel price cap for refined products like diesel, and a $45 price cap for those that trade at a discount, like fuel oil. These levels would not disrupt the market, but the EU’s eventual ban on diesel will force Russia to diversify its market share and may cause difficulty in finding markets for its sales.
France’s main trade unions will hold a general strike on Jan. 31 to protest the government’s plan to reform the pension system. This will be the second such action after the Jan. 19 general strike, when over a million people took to the streets across the country, severely disrupting transportation and schools. The French government plans to pass the reform during the first half of the year but its success depends on support from opposition parties in the National Assembly, as the President’s party does not have a majority.
Stratfor.com
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