Marketmind: PCE in our time as US economy impresses
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[January 26, 2024] A
look at the day ahead in U.S. and global markets from Mike Dolan
There was little for markets to dislike in the impressive sweep of U.S.
economic and corporate healthchecks on Thursday - unless of course
you're wary of higher oil prices or hold Tesla shares.
The icing on the cake later today would be confirmation in December's
PCE inflation update that the Federal Reserve is effectively hitting its
target already as it prepares to meet next week for the first time in
2024.
Once again, Wall St stocks clocked another record high after news that
real U.S. GDP growth raced past forecasts in the fourth quarter -
jumping 3.3% even as various underlying inflation measures sank to 2% or
below.
Although a slowdown from the blowout 4.9% the previous the quarter, GDP
for the full calendar year exceeded 3% - making a mockery of consensus
forecasts for 2023 contraction just 12 months earlier and recession
predictions from many.
Most strikingly, the boom comes as core PCE inflation for the quarter
ran at the Fed's 2% target. And even though there were quibbles in some
quarters about how GDP deflator is calculated, its 1.5% rate in Q4 -
taken at face value - is a green light for the central bank.
With many annualised cuts of PCE inflation, the Fed's favored gauge, now
at or below target, the Street forecasts the year-on-year core rate
dropped to 3.0% last month.
And even if you were concerned the labor market is still too tight,
there was a bounceback in weekly jobless claims data too on Thursday to
keep things in check.
With one eye on next week's Treasury refunding announcements as well as
the Fed meeting, Treasury yields fell back and Fed futures moved to up
full-year easing to as much as 140 basis points again and a 50-50 chance
of a March start.
Also thrown into the mix was a dovish take on the European Central
Bank's latest meeting, which markets read as holding out a greater
chance of a rate cut there as soon as April and ECB sources said an even
earlier move was possible.
What's more, core inflation in Japan's capital slowed below the central
bank's 2% target to the lowest rate in nearly two years, data showed on
Friday, raising more questions about whether the Bank of Japan should be
any rush to up rates there.
What could go wrong?
Well, a jumpback in crude oil prices gave worriers something to chew on.
Oil hit a 2024 high and was heading for a second weekly gain - in part
spurred by the U.S. economic growth picture, but also signs of more
Chinese stimulus emerging alongside Middle East supply concerns.
That said, year-on-year crude prices are tracking losses of more than
5%.
But the corporate earnings season wasn't all sweetness and light either.
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Traders work on the floor at the New York Stock Exchange (NYSE) in
New York City, U.S., January 23, 2024. REUTERS/Brendan McDermid/File
Photo
Electric automaker Tesla's latest sales warning saw it depart the
'Magnificent Seven' of megacap stock leaders - shedding 12% and some
$80 billion in market cap on Thursday.
And chipmaker Intel was another outlier, plunging 10% overnight
after the bell as it forecast revenue for the first quarter that
could miss market estimates by more than $2 billion.
Wall St futures were slightly in the red ahead of Friday's open. The
dollar index was a touch lower.
The other concern is whether China's officials can get across the
worrying economic and market funk there.
Aided by some signs of more potent monetary and fiscal stimulus
measures from Beijing this week, Bank of America data showed
investors poured almost $12 billion into Chinese equity funds in the
week to Wednesday, the most in a week since 2015.
But as China prepares for the Lunar New Year holiday break early
next month, stock markets there gave back some of the week's bounce
on Friday and many foreign investors remain unsure of how the
government can restore confidence and stabilise the ongoing property
bust.
A key offshore bondholder group of China Evergrande plans to join a
petition to liquidate the developer at a hearing in a Hong Kong
court on Monday. The bondholder group owns more than $2 billion in
offshore notes guaranteed by Evergrande and its support to a
winding-up petition against the world's most indebted developer
increases the chances of an immediate liquidation order.
And many provinces in China, including the financial hub of
Shanghai, have set modest 2024 economic growth targets after missing
their previous goals, in a sign that a nationwide recovery to
pre-pandemic levels would prove elusive this year.
On the other hand, relatively wealthy Chinese still seem to be
spending. LVMH jumped 8.2% in Europe after the world's largest
luxury group posted a 10% rise in fourth-quarter sales, driven by
resilient demand, including from China.
Key diary items that may provide direction to U.S. markets later on
Friday:
* U.S. Dec PCE inflation estimates, Dec pending home sales
* U.S. corporate earnings: American Express, Colgate-Palmolive,
Norfolk Southern
(By Mike Dolan, editing by Ros Russell mike.dolan@thomsonreuters.com)
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