Equity markets are pushing higher on Wednesday, buoyed by softer yields and some promising PMI revisions in Europe.
It would appear investors are increasingly coming around to the idea that central banks will be forced into cutting rates earlier than previously anticipated in order to support the economy. That would also suggest they anticipate inflation will subside faster than previously thought which would be welcome if true after a year of overshoots.
I’m sure this is a position that will change a lot in the coming months just as it has in those passed but it’s seemingly boosting risk appetite in the first week of the year. You just have to wonder how much resilience economies have in the interim to weather the cost-of-living storm.
This is where the other data points will become increasingly influential. The PMIs this morning, for example, were largely contractionary but only marginally so and the upward revisions for Germany, France, Italy, Spain, and the bloc as a whole will offer some encouragement.
I feel we’ll have a lot more clarity by the end of the first quarter in a number of ways from the path of inflation, terminal rates, and the ability of economies to continue to withstand those pressures. It will no doubt be a whirlwind quarter but one after which the rest of the year could look more promising. Or maybe this optimism is just a hangover from all of the festivities.
Fed minutes eyed
There’s plenty more to come today that could potentially dampen the mood, most notably the Fed minutes from the December meeting. The central bank is determined to reinforce its hawkish stance on investors and prevent an unwanted loosening of financial conditions and the minutes could be another opportunity to do so. Whether investors will be in the mood to listen is another thing.
And then there are the ISM manufacturing PMI and JOLTS job openings, both of which have the potential to shake things up during such an uncertain period. It promises to be a very interesting second half of the week.
Slide continues amid uncertain China outlook
Oil prices have tumbled again today, hit it seems by the uncertain near-term economic prospects for China amid surging Covid cases. While reliable data is seemingly hard to come by, the view appears to be that there’ll be significant disruption in the coming months and then a recovery from around the middle of the year which should then boost demand.
Brent has now slipped back below $80 a barrel while WTI has fallen below $75, with both now only around 5% from the December lows. Despite this, the medium-term prospects still appear quite bullish, especially if China can bounce back strongly later this year and fully transition to living with Covid, like much of the rest of the world. Of course, Russia remains the wildcard in all of this, both in terms of its output and influence within OPEC+.
Gathering momentum ahead of FOMC minutes
Gold is charging higher again buoyed by lower yields and a softer dollar. The yellow metal was running on fumes into the end of the year but appears rested and revitalized at the start of 2023. Not only is it rallying, but it’s also building momentum, something that was lacking towards the end of December. Of course, whether that will be sustained will depend on the Fed minutes and, maybe more so, Friday’s jobs report. We’ve had many setbacks over the past 12 months but who knows, maybe 2023 will be the year of positive surprises. Or perhaps that’s all the festivities talking again.
Cautiously higher
There isn’t much to add on the bitcoin front. It remains in consolidation, buoyed slightly by better risk appetite in the market but still in the $16,000-$17,000 range. A move above here is possible if risk appetite remains positive but I’m not sure traders will get too carried away. Headwinds remain significant for cryptos and it may take some time for traders to get back on board.
