Macro The Week Ahead

Stocks May Rise on U.S. PCE Data, Euro at Risk on German CPI: Macro Week Ahead

By:Ilya Spivak

Wall Street is looking for PCE inflation data to greenlight stock gains, U.S. dollar weakness. Meanwhile, the euro hangs in the balance as German CPI numbers shape ECB rate cut expectations.

  • Euro hangs in the balance as German inflation data shapes ECB rate cut outlook.
  • Chinese PMI surveys may encourage bargain-hunting in local stocks, Aussie dollar.
  • U.S. PCE data unlikely to dislodge Fed policy bets, triggering a “risk on” response.

Financial markets put in a muted performance last week as liquidity drained around U.S. market closures for the Thanksgiving holiday.

The bellwether S&P 500 stock index eked out a modest gain of 0.9%. The high-flying Nasdaq, the small-cap Russell 2000 and the blue-chip Dow Jones Industrial Average put in similarly tame results.

Bond prices inched negligibly lower, and yields rose as Treasuries digested the prior week’s spirited gains. Gold edged up toward the top of its recent range but struggled to break higher despite a weaker U.S. dollar as geopolitical risk premium continued to leech out of the market. Crude oil prices tellingly fell for a fifth week, albeit modestly.

Here are the key macro waypoints for traders in the week ahead:

German consumer price index (CPI) data

Inflation is expected to slow for the fifth consecutive month in the Eurozone’s largest economy. Experts expect the EU-harmonized measure of German CPI–the version most relevant for policymaking at the European Central Bank (ECB)—to grow 2.6% year over year in November. That would be the lowest since June 2021.

Leading purchasing managers index (PMI) data from S&P Global showed inflation picking up in both Germany and the broader Euro Area in November, with wages in the service sector flagged as the culprit. Meanwhile, numbers from Citigroup (C) show that regional economic data outcomes have increasinglyimproved against baseline forecasts recently.

This might set the stage for an upside surprise. Taken at face value, which might delay the expected onset of ECB interest rate cuts and boost the euro.

However, hopes for speedier stimulus have seemingly helped the currency in recent weeks, stoking bets on a quicker recovery and underpinning demand for euro-denominated assets. If that dynamic holds, higher CPI may turn out to pressure the euro alongside local stock markets–and ETFs benchmarked to their performance, like the iShares MSCI Eurozone ETF (EZU).

German Inflation
Data: Bloomberg

China purchasing managers index surveys

Economic activity in China is expected to remain near standstill in November. Two sets of PMI surveys—an official one from the China Federation of Logistics and Purchasing (CFLP) and a private-sector analog from Caixin and S&P Global—are due to show that a weak but growing service sector continued to pull along the world’s second-largest economy even as manufacturing contracted for a second consecutive month.

Analytics from Citigroup suggest Chinese data outcomes now skew toward surprising on the upside relative to expectations. This may mean that markets have already priced in the bulk of the bad news about the country’s disappointing performance this year.

Results need not be “good” in this case, with investors settling for “tolerable” to nibble on bargain-hunting opportunities in China-sensitive assets. That might lift local stocks and the ETFs tracking them, like iShares China Large-Cap ETF (FXI) and Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR). The Australian dollar may also get a lift.

China Composite PMI: Economy Near Standstill
Data: Bloomberg

US personal consumption expenditure (PCE) inflation data

The Federal Reserve’s favored measure of U.S. inflation is expected to show that headline price growth slowed to 3.1% year-on-year in October. The core gauge excluding volatile food and energy prices is seen falling to 3.5%, the lowest since April 2021.

Absent a dramatically sharp deviation from the forecast—an inherently unlikely outcome–the release is unlikely to shift Fed policy bets in a lasting way. The uneventful passing of event risk may then be read as a “risk on” signal for the markets, pushing up stocks and weighing on the U.S. dollar.

U.S. PCE Price Index y/y
Data: Bloomberg

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.

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