Will we avoid a deep recession?

Will we avoid a deep recession?
  • A slowing Fed?
  • Europe’s (slightly) brighter future
  • Why the UK is different
  • Will 2023 be the year of crypto regulation?
  • Key data for the coming week
  • ​Corporate earnings for the coming week

US: 
S&P 500   4.16% QTD 
Nasdaq 100   4.29% QTD 
Dow Jones Industrial Average   2.30% QTD 
NYSE  3.06% QTD 

Europe:
Stoxx 600  7.68% QTD 
DAX   9.04% QTD 
CAC 40   9.42% QTD 
IBEX 35  8.56% QTD 
FTSE MIB  9.89% QTD
FTSE 100   5.09% QTD 

Global:
MSCI World Index  5.40% QTD 
Bitcoin   25.31% MTD 
Ethereum   27.49% MTD

Note: As of 5 pm 18 January 2023 EST

Will the signs of slowdown be enough to slow the Fed? The signs of a slowing economy are becoming clearer: US industrial production fell 0.7% in December compared with the previous month, US retail sales fell 1.1% in December, a second straight month of declines, producer price inflation dropping to 6.2% in the 12 months to December, headline CPI down to 6.5% in December from 7.1% in November, and manufacturing production fell 1.3% in December, the largest decline since February 2021. However, some policymakers have stated that they think the policy range has to go above 5% including Cleveland Fed President Loretta Mester and St. Louis Fed President James Bullard with the latter saying that the pace doesn’t have to slow. However, Philadelphia Fed President Patrick Harker reiterated on Wednesday that he wants a slower but continuing path of rate rises. The Fed's benchmark overnight lending rate currently sits in a target range of 4.25% to 4.50%. Investors expect the Fed to slow the pace of its rate hikes by 25 basis points during its next meeting on 31 January-1 February. However, given the lagged effect of rate rises, this may not be enough to stop recession fears rising. 

There is also growing concern around the US debt ceiling with the US likely to hit its mandated $31.4 trillion borrowing limit on Thursday, forcing the Treasury to launch extraordinary cash management measures to try to prevent a debt default. Treasury Secretary Janet Yellen has said that the government could pay its bills only through early June without increasing the limit. This is far from the first time that the debt ceiling has needed to be raised and should be a routine matter as raising it does not authorise any new spending. The concern this time is that Congress is further divided than ever with Republican House Speaker Kevin McCarthy being too weak to control the more fractious elements of his party.

The USD has lost ground so far this year as falling inflation in the US is likely to reduce the pace of rate hikes. The GBP is  almost 2% YTD against the USD, the EUR   approximately 1% YTD, and the YEN is  over 2%, despite the Bank of Japan keeping its bond yield cap in place.

This week was a mixed week for discretionary stocks with Target CorporationExpedia GroupEtsyFord Motor CompanyGeneral Motors CompanyLas Vegas Sands Corp.Starbucks Inc., and Wynn Resorts all ending the week down. 

Consumer staples also had a bad week with Keurig Dr PepperGeneral Mills, the Hershey CompanyMcCormick & CompanyProcter & Gamble, and Walmart all down. 

Tech and growth mega cap stocks also had a mixed week: Apple and Amazon were up while AlphabetMeta PlatformMicrosoft and Tesla remained relatively flat. 

Europe’s hope for good weather. Prospects for the Eurozone appear to be improving as a warmer winter (so far) and falling energy prices, although still above pre-Ukraine crisis levels, give hope to the region’s investors that the Eurozone economy may only experience a shallow recession in 2023. However risks remain: the energy crisis could worsen in 2023 if extreme weather returns, thereby exacerbating attempts to reduce supply side inflation. Despite the Eurozone’s annual inflation falling to 9.2% in December 2022, down from 10.1% in November, the ECB is likely to raise rates by at least 50 basis points during its next meeting on 2 February. However, interest rates could peak by the summer, French Central Bank Governor Francois Villeroy de Galhau told a panel discussion at the World Economic Forum in Davos on Wednesday.

Is the UK striking out? Although inflation fell again in December to 10.5% from November’s 10.7% and October’s 11%, it seems that price stabilisation will take place at a much higher level than the 2% target. Core inflation, i.e., excluding energy, food, alcohol and tobacco prices, was unchanged at 6.3% in December. Inflation in the services sector accelerated to 6.8%, indicating that wage expectations may be shifting upwards. It is widely anticipated that the Bank of England will raise rates by 50 basis points to 4% at its next meeting on 2 February 2023 in response to this sticky inflation. However, although the economy managed to grow 0.1% in November, it is now beset by a series of public sector strikes with nurses, train staff, civil servants, teachers, university staff all striking. The Office for National Statistics said that 467,000 working days were lost to strikes in November — itself a 10-year high. The UK is still suffering from high energy prices, unresolved Brexit issues such as an agreement over trade in Northern Ireland, a very tight labour market, with unemployment at 3.7% and as noted by BoE Governor Andrew Bailey on Monday, labour shortages that could impede the expected decline of inflation in 2023, and make it less likely that the UK will avoid recession in 2023.

Who may regulate crypto? As noted by Bloomberg, the US Securities and Exchange Commission (SEC) is likely to gain the right to regulate the crypto sector in the US if an upcoming ruling in New York federal court determines that a digital token should be treated as a security and therefore should supply potential buyers with adequate disclosures. The timeliness of this decision will be closely monitored as the weaknesses in crypto regulation which have allowed crypto brokerages and hedge funds to go broke, losing investor money and confidence, continue to come to the fore. An example of this is the institutional crypto brokerage Genesis Global Capital, which is reported to now be laying the groundwork for a bankruptcy filing following on from FTX’s collapse in November. The company's institutional lending unit had to suspend redemptions and new originations. In 2022 Genesis lost $2.4 billion to hedge fund Three Arrows Capital after Three Arrows collapsed due to its exposure to the failed Terra token and stablecoin. 

Key data to look out for this coming week 

Europe:
Friday: German PPI data and speeches by ECB President Christine Lagarde and ECB executive board member Frank Elderson.
Monday: Eurozone Consumer Confidence.
Tuesday: German GfK Consumer Confidence survey, German S&P Global/BME Composite, Manufacturing and Services PMIs, Eurozone S&P Global Composite, Manufacturing and Services PMIs. 
Wednesday: German IFO Business Climate, Current Assessment and Expectations surveys.
Thursday: German Harmonised Index of Consumer Prices data.

UK: 
Friday: GfK Consumer Confidence and Retail sales data.
Tuesday: S&P Global/CIPS Composite, Manufacturing and Services PMIs. 
Wednesday: PPI Core Output data. 

In the US: 
Friday: A speech by member of the Federal Reserve’s Board of Governors, Christopher Waller. 
Monday: Chicago Fed National Activity Index.
Tuesday: S&P Global Composite, Manufacturing, and Services PMIs. 
Wednesday: Consumer Confidence survey. 
Thursday: GDP, Initial jobless claims, Continuing jobless claims, Core Personal Consumption Expenditures, Personal Consumption Expenditure Prices, Nondefense Capital Goods Orders, Durable Goods Orders data, and New Home Sales data.

Corporate Earnings for the coming week

Friday: SchlumbergerEricssonState Street CorporationHuntington BancsharesAll FinancialRegions Financial Corporation
Monday: Axis BankBaker HughesBrown & BrownSynchrony Financial
Tuesday: MicrosoftJohnson & JohnsonVerizon CommunicationsHalliburtonTexas InstrumentsUnion Pacific CorporationLockheed MartinGeneral Electric Company3M CompanyCanadian National RailwayThe Travelers CompaniesCapital One FinancialD.R. HortonPaccar Inc.Nidec Corp.
Wednesday: TeslaAbbott LaboratoriesNextEra EnergyAT&TU.S. BancorpServiceNow Inc.ADPGeneral DynamicsLam Research CorpKimberly-ClarkHess Corp.Crown CastleFreeport McMoRanCSX Corp. and Las Vegas Sands Corp.
Thursday: Visa Inc.MastercardComcastNorthrop GrummanArcher-Daniels-MidlandIntel CorpSherwin-WilliamsKLA-TencorNucorXcel EnergyT. Rowe Price GroupSouthwest AirlinesMcCormick & Co.V.F. CorporationLVMH Moet Hennessey Louis VuittonChristian Dior

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