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Uncertainty looms amidst political drama and economic data

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2024-01-08

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One way or another, the next month or so could very well set the tone for the first half of 2024. Will it be a continuation of the rosy belief that the Fed's interest rate pivot remains in place, or will it bring uncertainty and choppiness, as seen in the first trading week of the new year?

Will the narrative of resilient US economic growth and gradually easing inflation, which drove the 24% surge in the S&P 500 in 2023, remain the consensus view among investors? Or will the flow of new data from the final month of last year and the early months of 2024 force a change in thinking, especially concerning inflation and political uncertainty in the US?

Market sentiment has seen a significant swing. December's Bank of America Global fund manager's survey showed that 66% of fund managers believed the economy would achieve a soft landing in 2024, with only 15% of them expecting a recession in the next 12 months. This marks a sharp contrast from a year earlier when 68% of investors expected a recession.

No matter how the economic data flows, the overarching influence for the year will be the presidential campaign, with all its legal arguments, primaries, commentaries, opinion polls, fake stories, comments, and data.

The first real test won't be the Iowa primaries next week on January 15, but rather, analysts will be closely watching the margin of victory for Donald Trump over his nearest rival, Nikki Haley. If she finishes within 4% of Trump, his campaign will be under pressure.

However, the significant date to watch is February 8 when the US Supreme Court will hear arguments on the Colorado decision to ban Trump from the election. Given that the court is one he shaped during his time in office, the appeal from his campaign is expected to succeed, allowing him to participate in the campaign and election, according to US political pundits.

From then on, leading up to the November 5 poll, investors will face a difficult decision on how to position themselves for the election result and any potential aftermath, as was seen in 2020 when Trump contested the election results.

The basic question by then will be whether to short, sell, and retreat to the sidelines, or sit and hold on for dear life.

Moving away from the political arena, economic and business data will begin to flow this week, influencing markets and sentiment.

This week will witness the release of the December and 2023 Consumer Price Index and Producer Price Index on Thursday and Friday (US time), respectively. A slight rise to 3.2% or 3.3% in the CPI's annual rate from November's 3.1% reading is forecasted. Any higher figure, along with a higher-than-expected core figure, could lead to the 'rate cut-off' becoming the market mantra.

In the following week, retail sales for December and 2023 will be reported on January 18, with the final week seeing the release of another key inflation measure, the so-called PCE inflation estimates, especially the core reading, favored by the Fed.

However, the significant date to mark on the calendar is the first Fed meeting for 2024 on January 31 and February 1. The post-meeting statement and comments by Chair Jay Powell during his media briefing will play a crucial role in influencing sentiment and setting the tone for at least the first half of the year.

No changes in interest rates are expected from that meeting.

For stock markets, this week marks the start of the December quarter (and full-year) reporting season for most companies. Friday could set the early tone for the season, which is expected to see a modest 1.3% rise in earnings, with reports from major banks such as JPMorgan, Wells Fargo, Citi, Bank of America, Bank of New York Mellon, and giant investor BlackRock. Goldman Sachs and Morgan Stanley are due to report next week.

Delta Airlines and supermarket chain Albertsons are also set to report this week. However, earnings are not anticipated to have anywhere near the level of influence on share prices and trending expectations this year as the political dynamics, Fed meetings, Powell's comments, and key economic data such as the CPI and PCE figures.

In Australia, data releases for November signal a return to near-normal. Building approvals and retail sales data are scheduled for Tuesday, November jobs vacancies on Wednesday, along with the November monthly CPI indicator, November trade data on Thursday, and lending finance figures for the same month on Friday.

While a few small exploration and production reports are expected this week, the big ones will arrive next week from Rio Tinto, BHP, and Evolution.

Late this week, China will begin releasing December and 2023 data, including trade and inflation figures for the month and the full year. The CPI on Friday is forecasted to show a deepening in deflation to minus 0.7% from 0.5% in November, along with a deepening contraction in the producer price index to minus 3.2% from 3%. Trade data is also forecasted to show a small rise in exports and a minor dip in imports, with a trade surplus of $US76 billion forecasted ($US68 billion in November).

Additionally, vehicle sales figures for December and 2023 will be released on Friday.

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