The week ahead in the U.S. economy is poised for keen observation, with a spotlight on the Federal Reserve’s strategy amidst ongoing inflation concerns. A mix of caution and anticipation defines the mood as the Fed navigates communication challenges, hinting at delayed interest rate cuts to sustain economic stability. The GDP’s modest growth projection for 2024 underscores a delicate balancing act, aiming for a soft landing amid fluctuating market dynamics. Inflation trends toward the Fed’s target suggest a strategic pivot in monetary policy, with a detailed watch on core PCE inflation as a critical metric. This economic snapshot sets the stage for a week where data-driven insights will guide expectations and strategies in financial markets and policy formulations.
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The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
The ISM Non-Manufacturing PMI is an index that measures the health of the service sector in the U.S. economy, representing industries like healthcare, finance, and hospitality. It’s crucial because the service sector accounts for a significant portion of the U.S. GDP, making this index a key indicator of economic health and consumer spending. A reading above 50 indicates expansion, while below 50 signifies contraction. The document likely includes forecasts that provide insights into expected economic performance, guiding investors and policymakers in their decision-making processes. Unfortunately, I cannot directly access or summarize specific forecasts from the document within the given constraints.
Macro Market
- Fed: The Federal Reserve aims to ensure a “soft landing” for the economy, delaying interest rate cuts to June. This cautious approach underscores their focus on achieving stable growth and inflation rates.
- GDP: Real GDP growth is forecasted at 1.2% for 2024, an upward revision from previous estimates. This growth rate indicates a cautiously optimistic outlook for the economy, suggesting resilience amidst monetary policy adjustments.
- Inflation: Core PCE inflation is expected to decelerate, moving towards the Fed’s 2% target, with projections indicating it may fall below 3% year-over-year by the first quarter of 2024. This trend highlights the anticipated success of the Fed’s strategies in controlling inflation pressures.
M2 and Its Importance: M2 refers to a measure of the money supply that includes cash, checking deposits, and easily convertible near money. It’s a critical indicator for economists and the Fed as it provides insights into the public’s spending and saving behaviors, which can influence inflation and monetary policy decisions. An increase in M2 can signal higher spending potential, potentially leading to inflation if not matched by economic output, hence its significance in monetary policy considerations.
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Earnings
- 23Q4 Y/Y earnings are expected to be 7.8%. Excluding the energy sector, the Y/Y earnings estimate is 11.3%.
- Of the 230 companies in the S&P 500 that have reported earnings to date for 23Q4, 80.4% have reported earnings above analyst estimates. This compares to a long-term average of 66.6% and prior four quarter average of 76.4%.
- During the week of February 5, 76 S&P 500 companies are expected to report quarterly earnings.
Source I/B/E/S data from Refinitiv
Global Spotlight
Gaza Cease-Fire Efforts
A cease-fire proposal in Gaza is currently under consideration by Hamas, aimed at halting hostilities in the region for an extended period and reducing tensions in Lebanon. Despite Hamas’s insistence on a permanent cease-fire, Israel remains opposed to such conditions. Should the proposal be declined, diplomats will face the challenge of initiating a lengthy new negotiation process. As Israeli forces progress towards Rafah, the humanitarian situation in Gaza, where many refugees have sought shelter, is at risk of further deterioration following Israel’s invasion in October.
U.S. Response to Jordan Attack
Following a deadly drone strike in Jordan on January 28, which resulted in the death of three American soldiers, the United States initiated retaliatory actions on February 2, targeting sites in Syria and Iraq. This operation is part of a broader, phased strategy expected to continue over several days, focusing on the infrastructure of Iraqi and Syrian militias, as well as facilities used by Iran’s Islamic Revolutionary Guard Corps. Despite a halt in attacks by an Iraqi militia, the absence of similar commitments from others raises concerns over potential retaliatory actions against U.S. forces.
El Salvador Elections
El Salvador is poised for presidential and legislative elections on February 4. Incumbent President Nayib Bukele, enjoying high approval ratings, faces opposition from the Nationalist Republican Alliance and Farabundo Martí National Liberation Front, though his victory seems assured. Critics argue Bukele’s reelection could breach the constitution, but his overwhelming popularity suggests a first-round win. This outcome could further consolidate Bukele’s control, diminishing legislative opposition and accelerating the country’s shift towards authoritarianism.
Pakistan Parliamentary Vote
Pakistan’s upcoming parliamentary elections on February 8 will decide its new prime minister. Key contenders include the Pakistan Muslim League-Nawaz, led by Nawaz Sharif, and the Pakistan People’s Party, with Bilawal Bhutto Zardari at the helm. Imran Khan’s political future is uncertain due to his imprisonment and ineligibility to run, forcing his party to compete as independents. Sharif’s potential victory, backed by the military and recent legal acquittals, could spark protests over electoral fairness, highlighting concerns of military influence and electoral integrity.
Scholz-Biden Washington Meeting
German Chancellor Olaf Scholz is set to meet President Joe Biden in Washington on February 9 to discuss augmenting support for Ukraine amidst uncertainties over U.S. aid, compounded by congressional deadlock tied to immigration policy debates. This meeting follows the EU’s commitment to a significant aid package for Ukraine, overcoming Hungary’s previous objections. The leaders will also address the ongoing conflict between Israel and Hamas, emphasizing support for Israel and the urgent need for increased civilian protection and aid in Gaza. Additionally, this meeting will lay the groundwork for the upcoming NATO summit in July.
Stratfor.com
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