Global economic outlook | Week #4

In the US, the labor market has proven to be much more resilient than all estimates, with economic activities falling below expectations. However, retail sales continue to perform well. Across Asia, concerns have arisen due to the decrease in Chinese GDP, which led to the Chinese stock markets hitting a new five-year low. Meanwhile, in Japan, the anticipation of the continuation of expansionary policies propelled the Nikkei 225 to a new 34-year high.

 

As we enter the fourth week, let's explore what can be expected in the financial markets.

 

Geopolitical Tensions Update

As we approach the third month of the conflict in Gaza, tensions in the Middle East are escalating steadily. What initially began as indirect and proxy wars involving Iran, Israel, and the US are evolving into direct face-to-face confrontations, heightening the overall risk level in the region. The challenges posed by the Houthis, particularly their impact on shipping, have resulted in increased shipment costs, delivering unwelcome news for inflation and those striving to assert control over coastal areas.

 

Simultaneously, Western nations are falling short of fulfilling their pledged assistance to Ukraine in its ongoing conflict with Russia, which is about to reach its two-year mark. The mounting possibility of Donald Trump's return to the White House adds another layer of complexity, leaving Ukraine somewhat disillusioned, especially as the GOP shows reluctance to allocate additional funds to the prolonged war, which appears to have an almost certain future.

 

Without a tangible reduction in tensions, the global supply chain is at risk of remaining incomplete, leading to elevated prices and increased uncertainties. These factors are poised to significantly impact the economic landscape this year.

 

America in the Week Ahead

The upcoming week in America promises to be eventful, with notable occurrences in Canada, including the Bank of Canada (BoC) meeting and unfolding election stories in the United States. Additionally, it is imperative to keep a close eye on key economic indicators in the US, namely GDP (Thursday), New Home Sales (Thursday), Durable goods orders (Thursday), and Personal Income & Spending (Friday).

 

Recent data releases have confirmed a slight increase in prices, supported by robust demand and surprising retail sales figures. This development suggests that real personal consumption expenditures (PCE) may also see an uptick, potentially influencing Federal Open Market Committee (FOMC) members to refrain from adopting a dovish stance at present. Particularly noteworthy is the fact that initial jobless claims, recently released, dipped below 200,000 for the first time since March of the previous year. 

 

In the upcoming week, specifically on Wednesday, attention will be focused on the release of PMI data from Markit. Forecasts suggest a slight uptick in Manufacturing PMI for January, expected to reach 48.0, compared to 47.9 in December. Conversely, the Service sector is anticipated to show a gradual decline to 51.0 in January, down from 51.4 in the previous month.

 

Moving on to Thursday, market watchers should pay close attention to crucial economic indicators, including GDP numbers, Durable Goods Orders, and Housing market data. While certain Federal Banks are optimistic, expecting Q4 2023 GDP to grow by 2.2% and 2.4%, our projections indicate a more conservative estimate of 2.0% for the last quarter of 2023. Despite this potential variance, the overall positive and remarkable surge in economic activities throughout 2023 is unlikely to be replicated in 2024.

 

It's important to note that, even if the GDP rise falls short of estimates, an improved labor market and a resurgence in inflation could present the Federal Reserve with a more challenging scenario to navigate.

 

In contrast to the consistent growth observed in retail sales data over the past year, durable goods orders have faced a more challenging period. For the final month of 2023, we anticipate the headline index to increase by only 1.0%, a significant decline from the 5.4% growth recorded in November. Similarly, Core Durable Goods Orders are expected to experience a modest increase of only 0.2%, considerably lower than the 0.5% growth observed in November. These figures once again underscore the uneven growth and economic complexities of the United States in 2023.

 

Turning to the housing market, the focus will shift to new home sales numbers on Thursday. Projections suggest an increase to 640,000 units sold in December, up from 590,000 in November. This surge in demand can be attributed to lower mortgage rates, which have prompted affordability-constrained buyers to enter the market. Despite a 12.2% decrease in new home sales in November, there was still 1.4% year-over-year growth during the month. Overall, sales have demonstrated an upward trend for the majority of the year.

 

On Friday, the most significant data of the week will be unveiled with the release of the Fed's preferred inflation number, the Personal Income and Spending figures, offering a comprehensive insight into the economic condition of the United States. Thanks to the resilient labor market, real income continues to rise, paralleled by an increase in spending. In November, real personal spending saw a 0.3% rise over the month, and real personal income increased by 0.4%, marking the fastest gain in eight months. However, data indicates a trend toward reduced savings, with individuals increasingly resorting to credit cards and auto loans.

 

For December, we anticipate a further 0.4% increase in spending over the month, bolstered by a 0.3% gain in income. Additionally, both the headline and core PCE deflators are expected to experience a 0.2% rise over the month, representing slight accelerations compared to November if realized. This data will provide crucial insights into the dynamics of inflation, income, and spending, shaping our understanding of the economic landscape in the United States.

 

In Canada, the central bank is set to announce its interest rate decision and hold a monetary policy meeting on Wednesday. The prevailing expectation is that the Bank of Canada (BoC) will maintain its policy rate at 5.00%. However, the emphasis will be placed on the tone of the accompanying statement, offering insights into how Canadian policymakers perceive risks to the inflation outlook and when they anticipate the economy will be ready for further policy rate increases.

 

Recent inflation data, released last week, indicated that unlike in Europe and the US, prices did not experience an increase in December. Nevertheless, wage growth and inflation within the service sector are expected to remain focal points for BoC policymakers. The anticipated decision to keep the policy rate unchanged is likely to be interpreted as a hawkish signal, potentially strengthening the Canadian Dollar against other currencies. Market participants will keenly observe the communication from the BoC for cues on their stance towards inflation and future policy adjustments.

 

Earnings of the Week

The upcoming week boasts a packed earnings calendar, featuring major companies reporting their financial results. Here's a glimpse of key earnings announcements:

 

Tuesday: 3M (MMM), Johnson & Johnson (JNJ), Procter & Gamble (PG), Netflix (NFLX), Verizon (VZ), 

Wednesday: Tesla (TSLA), IBM (IBM), AT&T (T)

Thursday: Visa A (V), Intel (INTC), NextEra Energy (NEE)

Friday: Caterpillar (CAT)

 

Investors and market analysts will closely watch these earnings reports for insights into the performance and outlook of these influential companies. Earnings releases often impact stock prices and can provide valuable information about the health and trajectory of various sectors within the market.

 

Europe in the Week Ahead

Beyond inflation data, economic releases were relatively sparse in Europe last week. In the Eurozone, headline inflation surged by 2.9% in December, a notable increase from November's 2.4%. However, the Core Consumer Price Index (Core CPI) exhibited a more modest growth of 3.4%, slightly slower than the 3.6% observed in November. These figures underscore the challenging decisions facing the European Central Bank (ECB), particularly in light of weaker-than-expected economic data.

 

The United Kingdom faced a similar situation, with annual headline CPI rising to 4.0% from November's 3.9%. On the other hand, service inflation edged up to 6.4%, a slight increase from the 6.3% recorded in November but generally following a modest downward trend since the summer of 2023.

 

Looking ahead to the upcoming week, Europe's focus will shift to the ECB meeting. The European Central Bank is expected to hold its policy meeting on Thursday, with the deposit rate anticipated to remain at 4.00%. While a change in the policy rate is not expected, market participants will closely scrutinize the ECB's assessment of the economy and any hints regarding potential future monetary policy adjustments. In recent speeches, ECB President Lagarde suggested a possible lowering of interest rates by or during the summer, although some hawkish ECB policymakers propose a later timeline. The market's reaction will hinge on the tone of the statement and the ECB's economic projections.

 

Asia and Oceania in the Week Ahead

In the upcoming week, Asia and Oceania will be closely monitoring the policy meetings of the People's Bank of China (PBoC) and the Bank of Japan (BoJ).

 

In Japan, recent data has confirmed a cooling of inflation, with CPI slowing to 2.6% in December from 2.8% in November. Core CPI also declined to 2.3% year-over-year from the previous month's reading of 2.5%. Additionally, November labor cash earnings slowed unexpectedly to 0.2% year-over-year, indicating challenges in the labor market. Despite these concerns, the Bank of Japan is anticipated to maintain its policy rate at -0.10% with no adjustments to its Yield Curve Control policy in its Tuesday meeting. The statement accompanying the decision may provide insights into the possibility of an interest rate increase in April. The expected decision means more support from the Japanese stock markets for now unless the results are not what we predicted.

 

In China, while inflation remains negative, the Q4-2023 GDP growth of 1.0% quarter-over-quarter and 5.2% year-over-year has raised concerns. The overall expectation is for slower GDP growth in 2024 compared to the previous year, coupled with the potential challenge of rising youth unemployment.

 

Although the People's Bank of China has left the policy rate unchanged at 3.45%, there is limited economic data in the week ahead. Market participants will closely watch for any developments that could impact the economic landscape in the region.

 

In Oceania, the focus will be on New Zealand as inflation numbers are set to be released on Wednesday. Expectations for the fourth quarter of 2023 suggest a modest 0.5% rise in the Consumer Price Index (CPI). This forecast is notably lower than earlier estimates. The annual inflation rate for the last quarter is also anticipated to be around 4.7%. The deviation from previous estimates raises questions about the inflationary pressures in New Zealand during the specified period.