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China Eases Covid; FOMC Dec Releases 

China reopening its borders fully as well as slowing wage growth and a decline in service sector in the US have fuelled a positive first week of the year for equity markets, which saw shares in London hit their highest level in four years. Whilst China is well positioned now - and earlier than expected - to drive global growth, the outlook on inflation and the Federal Reserve’s reaction function remain uncertain. Whilst the ISM services PMI showed the sector fell into contraction in December, jobs growth remains strong, even if wages were not growing as fast as thought. And minutes from the FOMC’s December meeting released last week underlined the Fed’s determination to continue tightening. Some heat coming out of the wage data seems to be what’s got investors most excited on Friday, but we should not overlook the rapid reopening of China going forward, which I would expect to be more positive for UK and European indices vs US peers.  

  

Mixed Bag for Traders 

The combination of weak services activity and slowing wage growth sent equities higher on Friday. The Dow Jones and S&P 500 both rose more than 2% on the day to finish higher in the first week of the year. The FTSE 100, which already enjoyed a much better 2022 than virtually all its peers thanks to its defensive qualities, rallied to its highest close four years, whilst sterling also made gains versus the dollar as risk sentiment improved. In fact, the dollar (DXY) is now towards the bottom of the recent range, testing its mid-December lows again around the 103 level. In early trading on Monday, the FTSE 100 made modest further gains to take it north of 7,700.  The DAX also rose to test the June 2022 swing highs above 14,600. So far not seeing a big kick on from Friday’s rally with US futures also trading just a few ticks higher this morning. Oil is higher this morning after declining 8% last week, with spot WTI to $76 and Brent above $80. Gold has risen to its highest since June with real rates (10yr TIPS) at a month low and the dollar softer. 

 

Rates Not Falling Any Time Soon 

Let’s be clear – the difference between 0.3% wage growth or 0.4% wage growth is not a heck of a lot. The market is moving sharply on such small margins which confirms to me that the low is not in. We need to pay attention to the Fed. The minutes made it pretty clear it’s not done yet: “A slowing in the pace of rate increases was not an indication of any weakening of the Committee’s resolve to achieve its price-stability goal or a judgment that inflation was already on a persistent downward path,”... and “an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee's reaction function, would complicate the Committee's effort to restore price stability". No FOMC members expect to cut rates in 2023, in spite market pricing suggesting that the Fed will seek to ease later in the year as the economy slows. This goes back to our 2023 outlook prognosis – with inflation remaining persistently high and jobs growth solid due to structural tightness in the labour market, the Fed won’t be able to fall back on its traditional policy of cutting rates to boost output.   

  

Inflation Inflation Inflation 

With investors squarely focused on inflation moving back to the Fed’s target, US CPI inflation figures on Thursday will be the highlight of the week. Market participants expect inflation to slow to 6.6% in December from 7.1% in November, with core CPI slowing to +5.7% from +6.0%. This would be quite a cooling and creates a high bar for bulls. We’re also going to hear from Fed chair Jay Powell. And some of the big US banks kick off earnings season on Wall Street. Not a lot on the slate today but earlier data showed German industrial production grew 0.2% in November, up from a drop of 0.4% in the previous month. 

  

SPX – looking to see if the bullish MACD crossover is sign that 4,150 can be retested before the final flush.  

  


 

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