Macro the week ahead

Stock Market at Risk as Rate Cut Expectations Cool and China Struggles

By:Ilya Spivak

Stocks and bonds may continue to suffer as the U.S. dollar rebounds amid cooling Fed rate cut bets. U.K. inflation data may likewise push back on stimulus hopes, but weakness in China still threatens global growth.

  • Fear of global recession may resurface if economic data from China disappoints.
  • The British pound may get a lift if U.K. inflation data cools rate cut speculation.
  • Steady U.S. retail sales growth may challenge dovish Fed policy expectations.

Another holiday-shortened week for U.S. financial markets has opened with a wave of skepticism about the priced-in expectations for Federal Reserve monetary policy. Stocks fell alongside bonds as yields pushed higher. The U.S. dollar drove higher against its major counterparts and gold prices fell.

A unifying pattern screams to be seen. Indeed, rate cut expectations priced into Fed Funds futures have visibly cooled. Nevertheless, traders still anticipate six 25-basis-point (bps) reductions are on the menu this year. The first cut is seen appearing no later than May. The probability of a sooner move in March is at a hefty 66.8%.

The markets will have to contend with a dense economic calendar from here.

Chinese economic activity data

Analysts expect to see economic growth accelerated in the world’s second-largest economy in the fourth quarter of 2023. China is due to report gross domestic product (GDP) grew 5.3% year-on-year, topping the 4.9% increase in the three months to September.

Citi China economic surprise index
Source: Bloomberg

Parallel releases are set to show industrial production grew 6.6% year-on-year in December, matching November’s pace. Meanwhile, retail sales growth slowed to 8% over the same period, cooling after the prior month’s jump of 10.1%. The jobless rate is penciled in at 5% for the fourth consecutive month.

Analytics from Citigroup suggest realized outcomes for Chinese economic releases are cautiously drifting away in a disappointing direction relative to baseline forecasts over recent months. If that proves to set the stage for downside surprises, fears of a global slowdown may keep stocks pressured even as bonds rebound and yields come in.

U.K. consumer price index (CPI)

Inflation in the UK is seen cooling in December. A rise of 3.8% year-on-year in the consumer price index (CPI) is expected, marking the lowest reading since September 2021. Traders will look for the outcome to offer a view on broader monetary policy trends as most global central banks gear up to join the Fed in cutting back borrowing costs.

Source: Bloomberg

Food prices remained the biggest contributor to price growth in November. Bank of England (BOE) policy has relatively little influence here, and pressure appears to be receding by itself. The other pillars of price growth—recreation and hospitality—are helpfully amenable to cyclical coercion, however, and ought to ease as economic activity slows.

Leading purchasing managers’ index (PMI) data suggests U.K. economic activity returned growth and even accelerated over the past two months, powered by a resurgent service sector. BOE rate-cut expectations might adjust to a more modest setting if this buoyancy echoes in the CPI data, boosting the British pound.

U.S. retail sales

A familiar story is expected from the U.S. consumer in December. Receipts are seen rising recording a monthly rise of 0.4% in December, marking a slight pickup from November’s 0.3% increase. That would put the pace of sales growth firmly in line with quarterly, half-year and 12-month trend averages.

U.S. retail sales M/M (%)
Source: Bloomberg

Citigroup data suggests that expected and realized results on U.S. economic data flow have converged in recent weeks, suggesting that outcomes are unlikely to stray too far from baseline forecasts. The key question posed by middling figures is whether the Fed will truly cut rates as swiftly as expected absent signs of acute economic pain.

If markets conclude current pricing is indeed excessive, a readjustment of the baseline toward expectations of a more modest easing effort may add fuel to the moves already underway at the start of the trading week. That bodes ill for stocks, bonds and precious metals, while the U.S. dollar may continue to press upward.

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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