New York Close: Empty suit

On the surface, the better-than-expected headline growth print dismissed the notion that the US was close to a cliff edge as 2022 wound to a close, although frankly, that is an empty suit; I am not sure anyone nursed that position.

Real GDP rose 2.9% annualized in the fourth quarter, three-tenths above consensus. However, the details were much softer, as inventories contributed over half of the increase and will l weigh like an anvil on Q1 growth. Indeed, the devil in the details always comes back to bite you.

So while markets are digesting new information from both the economy and Mega Cap land, which on net are driving stocks a bit higher on the day, with that burdensome 2022 inventory overhang and a recessionary-tinged US retail sales prints still fresh on trader minds, we may have to wait a bit to see, however, if this January 5%+ gain is the start of a breakout to the upside or just another lark to nowhere.

Given the prevailing sense of macro peril still hanging over the world’s largest economy like a storm cloud billowing ominously on the horizon, it is bound to be a grinding affair if we do move higher.

Hence from short-term trading to medium-term investing perspective, the GDP print should still present opportunities to double down on some of this year’s favourite trades like long gold and short US dollars.

With oil traders shifting the burden of proof toward visibility on bullish fundamentals, particularly around a pick-up in China demand and a drop in Russian production before being willing to deploy risk above current ranges, oil isn’t necessarily a chargeable asset at this stage. Traders may continue to trade this week’s dull yet alpha-generating spectra.

We need to be wary of a traditional interpretation of things when we’re still dealing with the oddities of a post-pandemic global economy, which includes the non-stop stream of recession-imminent calls. After all, the interplay between inflation and the labour market looks remarkably good at this game stage.

FED DOWNSHIFT

Investors would be wise to stay within guardrails on the Fed downshift trade, especially with PCE inflation on Friday’s radar. Yes, we are seeing the upside tails on inflation come out of the distribution channel, but for a handful of hiding-in-plain-sight reasons, count me skeptical that core PCE will get back to 2.0% in a tidy fashion, particularly as the second and third largest economies on the planet are just getting going in their respective reopening surge.

FOREX

Investors of many stripes are deploying capital outside of the US supporting Asia FX and G-10 currencies due to a large chunk of this flow being unhedged. Market participants will only get paid for the drop in European gas prices or China reopening for so long — and markets have already moved a lot — so I’m wary of enthusiasm to add risk above EURUSD 1.0935 and below USDCNH 6.70 for no other reason than we find the risk/reward hard to determine at current levels.

The ECB 50bp hike next week is in the price; the question is will President Lagarde throw her weight behind a further 50bp hike in February, raising the deposit facility rate into the mildly restrictive territory at 2.50%.

On the Yuan, besides a possible pushback below 6.70 from officials, from a purely economic perspective, we expect the RMB gains to moderate quickly as the reopening of borders will widen the tourism (services) deficit, and strong fiscal stimuli will lead to strong import growth, compressing the current account surplus.