Stock bulls are struggling to find a new catalyst as the road remains littered with potential land mines.
The Covid situation in China has gotten much worse as the number of cases has skyrocketed, there is also more talk that Putin will greatly escalate the Russian war effort as the winter worsens and here at home it will be more talk of stagflation as the Fed continues to tighten and the economy weakens.
Business
The bulls want to hold on to hope that the Federal Reserve will not have to hike rates as high as central bank officials are currently forecasting.
Most continue to point to various signs of a slowdown in the US economy, including inflation figures that have finally started to show meaningful declines. A major concern is that the Fed will tighten too far and push the economy into a deeper recession. The biggest bright spot for the economy right now is the exceptional strength of the US jobs market, which is helping consumers weather the current inflationary storm. In fact, the Fed expects unemployment to rise less than a full percentage point by the end of its rate hike campaign next year.
As long as the job market holds up, most bulls expect any recession to be relatively mild, which in theory should allow for a quick recovery in the economy and corporate earnings.
However, bears still believe that inflation will be harder to beat than many on Wall Street are anticipating, pointing to various global headwinds that could complicate the Fed’s campaign. These include the ongoing fallout from Russia’s war in Ukraine, as well as China’s efforts to end its “zero Covid” policy.
Front Russia
On the Russian front, there is concern that the West’s recently imposed price cap on Russian crude could further reduce Russian oil production as the country struggles to fund infrastructure maintenance.
Traders are also eyeing the upcoming EU ban on Russian petroleum products, which many fear could limit global supplies of gasoline, diesel and other supplies. Experts say the ban, which comes into effect on February 5, means the EU will have to replace about 1 million barrels of Russian products a day.
In the run-up to the ban, diesel imports into the EU are skyrocketing, which will dampen their supplies for a while but obviously won’t last indefinitely. Oil insiders believe that tighter global supplies could push oil and oil-product prices higher into the second quarter of 2023, especially if Europe has a severe winter.
China
The outlook for global energy supply is complicated by China, which is experiencing a very chaotic exit from its long-standing “zero Covid” policy, which has paralyzed parts of its economy for almost three years.
At the moment, Covid is raging in the country, where citizens have little immunity, hospitals and reportedly funeral homes in some cities are overwhelmed. Experts believe the death toll could reach as many as 2 million over the course of this winter. While Chinese officials have not officially reinstated lockdowns, citizens themselves are more or less keeping their mouths shut. Between self-imposed “lockdowns” and large numbers of people contracting the virus, experts fear it could all lead to further supply chain disruptions in the first half of 2023.
But once the country is freed from the reopening of the Covid wave, the next problem could be that demand for energy and other commodities will skyrocket while China ramps up its industrial sector and tries to revive its economy.
The bottom line is that high energy costs and another round of supply chain disruptions could act as an inflation buoy as the US economy feels the effects of the Fed’s tightening campaign.
This is reviving fears of longer-term ‘stagflation’ – persistently high inflation, high unemployment and slow economic growth – which many believe is far worse than a recession.
data to view
Investors will digest a lot of housing data this week, with many hoping for some slowdown in property prices as this will go a long way in bringing inflation numbers down.
The Housing Market Index is due today, followed by Housing Starts & Permits Tuesday, Existing Home Sales on Wednesday and New Home Sales on Friday.
On the earnings front, Carnival is the highlight today. General Mills, Nike and FedEx will announce their results tomorrow. Micron Technology will be the big name on Wednesday. CarMax will report on Thursday.
It’s Happening… Drone Delivery Gets Real When Walmart Launches: Walmart announced late last week that its drone delivery service is now available in the Tampa, Orlando, Phoenix, and Dallas areas. Hoppers near one of Walmart’s planned 34 drone locations can order up to £10. of eligible goods for air delivery within 30 minutes. The company works with drone services startup DroneUp, which uses FAA-certified drone pilots to fly its retail operations.
Comments are closed.