Stock bulls are struggling to find a new catalyst as the road ahead remains littered with potential landmines.
The Covid situation in China has gotten much worse as the number of cases skyrocket, there’s also more talk that Putin is going to greatly escalate the Russian war effort as winter worsens, and here at home there’s more talk of stagflation as the Fed continues to tighten and the economy is weakening.
Bulls want to hold on to hopes that the Federal Reserve will not need to lift rates as high as central bank officials are currently forecasting.
Most continue to point to various signs of a cooling US economy, including inflation reads that have finally begun to make meaningful declines. A big worry is that the Fed will tighten too far and push the economy into a deeper recession. Right now, the biggest bright spot for the economy is the extraordinary strength of the US labor market that is helping consumers battle the current inflation storm. In fact, the Fed expects unemployment will rise less than one full percentage point by the time it ends its rate hike campaign next year.
As long as the labor market holds, most bulls think any recession will be relatively mild, which in theory should allow for a swift economic and corporate profit rebound.
Bears, however, still believe inflation will prove harder to defeat than many on Wall Street anticipate, pointing to various global crosscurrents that may complicate the Fed’s campaign. These include ongoing fallout from Russia’s war in Ukraine as well as China’s effort to exit its “zero Covid” policy.
On the Russia front, one worry is that the West’s recently implemented price cap on Russian crude could further reduce Russian oil output with the country struggling to fund its infrastructure upkeep.
Traders are also eyeing the EU’s upcoming ban on Russian petroleum products which many worry could constrict global gasoline, diesel, and other supplies. Experts say the ban, which goes into effect on February 5, means the EU will need to replace around 1 million barrels per day of Russian products.
In the lead up to the ban, EU imports of diesel are skyrocketing, which will cushion their supplies for a while but obviously won’t last indefinitely. Oil insiders anticipate tighter global supplies could start to drive up prices of both oil and oil products by Q2 2023, especially if Europe has a harsh winter.
The global energy supply outlook is complicated by China, which is experiencing a very messy exit from its long-standing “zero Covid” policies that have locked down parts of its economy off and on for nearly three years.
Right now, Covid is raging in the country where citizens have little immunity, overwhelming hospitals and allegedly funeral homes in some cities. Experts anticipate the death toll could reach as high as 2 million over the course of this winter. While Chinese officials have not formally reinstated lockdowns, citizens themselves are more or less keeping themselves shuttered away. Between self-imposed “lockdowns” and a large number of people sick with the virus, experts are worried that it could all lead to more supply chain disruptions in the first part of 2023.
But once the country is clear of the reopening Covid wave, the next problem could be skyrocketing demand for energy and other raw materials as China ramps up its industrial sector and attempts to revive its economy.
The bottom line being that high energy costs and another round of supply chain disruptions could act as a buoy for inflation just as the US economy is feeling the impact of the Fed’s tightening campaign.
This is again raising fears longer-term of “stagflation” – persistently high inflation, high unemployment, and slow economic growth – which many believe is far worse than recession.
Data to watch
This week, investors will be digesting a lot of housing data, with many hoping to see some deceleration in home prices as that will go a long way in bringing down inflation reads.
The Housing Market Index is due today, followed by Housing Starts & Permits Tuesday, Existing Home Sales on Wednesday, and New Home Sales on Friday.
On the earnings front, Carnival is today’s highlight. General Mills, Nike, and FedEx report earnings tomorrow. Micron Technology will be the big-name reporting on Wednesday. CarMax will be reporting on Thursday.
It’s Happening… Drone Deliveries Becoming Real as Walmart Launches: Walmart announced late last week that its drone delivery service is now available in the Tampa, Orlando, Phoenix, and Dallas areas. hoppers near one of Walmart’s planned 34 drone sites can order up to 10 lbs. of eligible goods for aerial delivery within 30 minutes. The company is working with drone services startup DroneUp, which uses FAA-certified drone pilots to fly its retail sorties.
All Traders Need To Know on Monday: Economy, Russia, China and Data To Watch
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