A look at the day ahead in the U.S. and global markets from Mike Dolan
Markets found nothing wrong with Thursday's impressive economic and corporate health checks in the US – unless, of course, you're worried about higher oil prices or are holding Tesla shares.
The icing on the cake later today would be confirmation in the December PCE inflation update that the Federal Reserve is already effectively meeting its target as it prepares to meet next week for the first time in 2024.
Once again, Wall Street stocks hit a new record high after news that real U.S. GDP growth in the fourth quarter quickly beat forecasts, rising 3.3%, even as various underlying inflation measures fell to 2% or less.
Although GDP fell 4.9% quarter-on-quarter, GDP for the full calendar year was over 3%, making a mockery of consensus forecasts for a contraction in 2023 just 12 months earlier and many people's recession predictions.
Most strikingly, the boom comes with core PCE inflation for the quarter hovering around the Fed's 2% target. And while there has been disagreement in some quarters over how the GDP deflator is calculated, its rate of 1.5% in the fourth quarter is – taken at face value – a green light for the central bank.
With PCE inflation, the Fed's preferred measure, cut several times on an annual basis and now at or below target, the Street forecast the core rate fell to 3.0% year-over-year last month.
And even if you're worried that the labor market is still too tight, there was also a bounce in weekly jobless claims data on Thursday to help keep things under control.
Looking ahead to next week's Treasury refund announcements as well as the Fed meeting, Treasury yields fell back and full-year Fed futures rose, falling back down to as low as 140 basis points, a 50-50 chance of one Starting in March.
There was also a dovish stance towards the recent European Central Bank meeting, where markets saw a greater chance of a rate cut as early as April and ECB sources said an even earlier move was possible.
The story goes on
Additionally, core inflation in the Japanese capital fell below the central bank's 2 percent target and hit its lowest level in nearly two years, data showed on Friday. This raises further questions about whether the Bank of Japan should rush to raise interest rates there.
What could go wrong?
Well, a rise in crude oil prices gave the fears something to chew on. Oil prices hit a 2024 high and were headed for a second weekly rise, spurred in part by U.S. economic growth but also by signs that more stimulus from China is emerging alongside supply concerns in the Middle East.
However, crude oil prices recorded losses of more than 5% year-on-year.
But the company reporting season wasn't all pleasant and relaxed either.
Electric car maker Tesla's latest sales warning caused the company to fall behind the “Magnificent Seven” of mega-cap stock leaders, shedding 12% and about $80 billion in market capitalization on Thursday.
And chipmaker Intel was another outlier, plunging 10% overnight after the bell as it forecast first-quarter revenue that could miss market estimates by more than $2 billion.
Wall Street futures were slightly lower before opening on Friday. The dollar index was slightly lower.
The other concern is whether China's officials can convey the worrying economic and market crisis there.
Bolstered by some signs of stronger monetary and fiscal stimulus from Beijing this week, data from Bank of America showed investors pumped nearly $12 billion into Chinese equity funds in the week ending Wednesday, the highest in a week since 2015.
But as China prepares for the Lunar New Year holiday early next month, stock markets there gave up some of the week's recovery on Friday and many foreign investors remain uncertain about how the government can restore confidence and stabilize the ongoing housing crisis.
A key offshore bondholder group of China Evergrande plans to join a petition to liquidate the developer at a hearing in a Hong Kong court on Monday. The bondholder group owns more than $2 billion worth of offshore bonds guaranteed by Evergrande and its support for a liquidation petition against the world's most indebted developer increases the chances of an immediate liquidation order.
And many provinces in China, including the financial hub Shanghai, have set modest economic growth targets for 2024 after missing previous targets, a sign that a nationwide recovery to pre-pandemic levels would be difficult to achieve this year.
On the other hand, relatively wealthy Chinese still appear to be happy to spend. LVMH rose 8.2% in Europe after the world's largest luxury group reported a 10% rise in fourth-quarter sales on robust demand, including from China.
Key diary entries that could guide US markets later on Friday:
* PCE inflation estimates for US December, December, home sales pending
* US corporate earnings: American Express, Colgate-Palmolive, Norfolk Southern
(By Mike Dolan, Editing by Ros Russell [email protected])
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