Stock bulls are struggling to find a new catalyst as the road ahead remains littered with potential landmines.
The Covid situation in China has gotten much worse as the number of cases skyrocket, there is also more talk that Putin will dramatically step up the Russian war effort as the winter gets worse, and here, back home, the talk is more about stagflation as the Fed continues to tighten and the economy weakens.
Economy
Bulls want to hold out hope that the Federal Reserve won’t need to hike rates as high as central bank officials currently expect.
Most continue to point to various signs of a slowing US economy, including inflation readings that have finally started to make significant declines. A big concern is that the Fed will tighten too far and push the economy into deeper reduction. The biggest bright spot in the economy right now is the extraordinary strength of the US labor market which is helping consumers weather the current inflationary storm. In fact, the fed Expects unemployment to rise by less than a percentage point by the end of its rate hike campaign next year.
As long as the labor market holds up, most bulls believe any recession will be relatively mild, which in theory should allow for a quick rebound in the economy and corporate earnings.
The bears, however, still believe inflation will prove harder to beat than many on Wall Street anticipate, 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 exit its zero Covid policy.
Front of Russia
On the Russian front, there are fears that the price cap recently implemented by the West on Russian crude could further reduce Russian oil production, as the country struggles to finance the maintenance of its infrastructure.
Traders are also eyeing the upcoming EU ban on Russian petroleum products, which many fear will curb petrol, diesel and other global supplies. Experts say the ban, which will come into effect on February 5, means the EU will have to replace around 1 million barrels a day of Russian products.
In the run-up to the ban, EU diesel imports are skyrocketing, which will dampen their supplies for a while but obviously won’t last indefinitely. Oil industry insiders predict that tighter global supply could start to drive up oil prices and oil products by the second quarter of 2023, especially if Europe experiences a harsh winter.
China
world energy supply outlook is complicated by China, which is experiencing a very disorderly exit from its longstanding “zero Covid” policies that have intermittently locked down parts of its economy for nearly three years.
Right now, Covid is raging in the country where citizens have little immunity, overwhelming hospitals and allegedly funeral homes in some cities. Experts predict the death toll could reach 2 million this winter. Although the Chinese authorities have not officially reinstated the closures, the citizens themselves are more or less keeping their distance. Between self-imposed “lockdowns” and large numbers of people sick with the virus, experts fear all of this could lead to more supply chain disruptions in the first part of 2023.
But once the country is cleared of the reopening of the Covid wave, the next problem could be soaring demand for energy and other raw materials as China ramps up its industrial sector and tries to revive its economy. economy.
The bottom line being that high energy costs and another round of supply chain disruptions could act as a buoy for inflation just as the US economy feels the impact of the tightening campaign. from the Fed.
This again raises fears of longer-term “stagflation” – persistently high inflation, high unemployment and slow economic growth – which many believe is far worse than recession.
Data to monitor
Investors will be digesting a lot of housing data this week, and many are hoping to see some deceleration in house prices, as this will go a long way towards lowering inflation.
The housing market index is due today, followed by housing starts and permits on Tuesday, existing home sales on Wednesday and Sales of new homes Friday.
On the earnings front, Carnival is today’s high point. General Mills, Nike and FedEx will release their results tomorrow. Micron Technology will be the big name in the story on Wednesday. CarMax will report on Thursday.
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