Stock bulls are on edge ahead of key inflation data and the Federal Reserve’s policy meeting next week.
Adding an additional layer of uncertainty to the mix, investors are also now trying to determine the consequences of China reopening its economy. China’s government yesterday announced some easing of its key COVID-19 rules, including many of the country’s testing and quarantine requirements.
Not surprisingly, opinions vary widely as to how this might impact the global economy.
From what I understand, people with asymptomatic infections will be able to quarantine at home, which will only last five days. This should help ease worker shortages that have gummed up transportation networks and other parts of the supply chain. That is obviously good news for US businesses with manufacturing operations in China. It could also be positive for US consumer companies in China as citizens are allowed to resume normal activities.
Some analysts believe that resolving more of the global supply chain snarls might help further cool inflation. Others, however, fear that restarting China’s economic engine could supercharge global inflation, particularly if the country’s demand for oil, coal, steel, grains, and other commodities suddenly spikes.
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At the same time, China’s reopening could be short-lived due to the fact that the population has relatively low levels of immunity to Covid. Meaning cases could explode and create a whole new set of disruptions. Based on the experience of Hong Kong and Taiwan, which also had low levels of infections and vaccination of older people, Goldman Sachs economists predict that China’s Covid cases could peak anywhere between three million and 13 million a day by January.
What a large-scale outbreak might mean for quarantine and lockdown policies is hard to know at this point.
Beyond China, bears continue to talk about slower economic growth ahead as consumers deplete savings and rack up credit card debt, while corporate margins as well as sales continue to shrink.
Bears further argue that even if the US economy avoids recession, corporate earnings aren’t likely to be as lucky and warn that analysts estimates remain far too optimistic.
Data to watch
Bulls are still betting on a more dovish Fed next week to fuel a year-end rally, particularly if inflation data cooperates.
The key reports to watch are the Producer Price Index on Friday and the Consumer Price Index next Tuesday. Today, the Energy Information Administration’s oil inventory report is the only economic data of note. Earnings highlights today include Broadcom, Chewy, Costco, lululemon, Oracle, and Vail Resorts.
SP500 Bulls Are On The Edge
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