The new trading year starts on a high note as the crucial non-farm payrolls print is set for release on the Friday, January 6. Before this “main course”, the market will be served the appetizers in the form of the ISM Manufacturing survey and the Fed minutes from the December meeting. Could these releases brighten the somewhat gloomy outlook?
Manufacturing weakness spreading
The ISM manufacturing kicks off a very busy week for the US economic calendar. Since March 2021 the headline index has been on an acute downtrend, finally dipping below 50 in November, signaling a contraction in the manufacturing sector. It is closely matching other manufacturing surveys from regional federal reserve banks. The December print released on Wednesday, January 4 is expected to show another drop to 48.5 for the headline indicator. This homogenous message of ongoing weakness is one the main factors contributing to the extensive recession talk for 2023.
Looking under the hood, the prices paid and the new orders sub-components are of particular interest. The former has been in freefall lately, easing concerns about runaway inflation. Most market participants and Fed members assume that the PCE index is past its peak. However, a jump in the prices paid sub-index, for example above 50 for December, could raise some eyebrows in the market about the future path of Fed funds rate. Similarly, the “new orders” component holds significant market impact potential. It comes amidst an overall clouded business outlook as seen in durable goods orders lately and other non-manufacturing business surveys.
Fed meeting minutes unlikely to hold surprises?
On Wednesday we also get the minutes of the December 14 Fed meeting. As it was expected, another rate hike, in the tune of 50bps, was announced at that meeting. However, the heightened terminal rate, seen at 5.1% against 4.6% at the October meeting, took the market by surprise. Powell’s rhetoric at the ensuing press conference was less hawkish than in previous meetings as the Fed feels more comfortable following a total of 425 bps of rate hikes. The full extent of the minutes would be closely scrutinized but the market focus would fall on any recession talk, especially as consumer spending is slowing and the housing sector is showing cracks. There is increasing evidence of a widespread slowdown in this crucial sector, especially as the reported prices have fallen for four straight months, according to the S&P Case-Shiller home price index.
But the icing on the cake would be the discussion on the Fed’s next steps. Powell commented that the Fed “still has some way to go on rate hikes” and it would be interesting to see the number of FOMC members agreeing wholeheartedly with this approach. As the Fed is approaching a decade-high in Fed funds rates, there could be louder voices in the Fed meeting asking for a more passive strategy ahead, for example pausing at the current rate and allowing the economy to digest the more expensive price of money. Such a strategy could potentially manage to ease the 2023 recession concerns and somewhat cheer up the troubled stock markets, especially the underperforming US technology sector.
EURUSD in waiting mode
USD is recording an abysmal fourth quarter following almost two years of continued outperformance against most currencies. EUR has been one of the main beneficiaries of the USD’s retreat. The pair has climbed aggressively above parity, evaporating the market forecasts for a move towards the 0.8 level. It currently appears to consolidate at the 1.06 area as market participants weigh their options ahead of the new trading year. The overall technical picture appears to be tilting towards the bullish side, particularly as the golden cross between the 50-day and 200-day SMAs could occur soon, and despite the stochastic oscillator prepping to potentially signal a bearish bias.
