U.S. stocks traded off the session high as the pendulum still swings around the Fed reaction function despite some investors getting gingerly comfortable with the notion that the U.S. can achieve a ‘soft landing.’

In a case of “Deja vu all over again,” early in the U.S. session, markets assumed a risk-on, pro-cyclical stance, with stocks moving in a way that was remindful of the early days of the U.S.’ reopening, likely a favourable knock-on effect from China’s reopening epiphany. At the same time, investors are trying to cuddle last week’s weak Services sector business sentiment survey and hope the early signs of declining wage inflation will cause the Fed to blink. Mind you, hope is a dangerous thing when it comes to the Fed, which from a market perspective, can be the cruellest head of households at times.

And worryingly, as investors peer through this week’s looking lens, 4Q22 earnings start at the end of this week. What we absorb from Corporate America will be vital to understanding how the post-post-pandemic era is beginning to shape up. But this is where the balance of risk lies for Index investors. The sentiment here is extremely negative heading into earnings. “The Street” universally expects downward revisions to consensus 2023 EPS forecasts as margin pressures, taxes, and a broader growth slowdown present more significant downside risks. And if the Fed does not play ball for the soft-landing crowd, markets could be back in a world of hurt.

So, what else can go wrong?


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Although CPI headline inflation has peaked, a tight labour market and upward pressure on wages in the U.S. could keep core services inflation more persistent.

Speculation about a less aggressive Fed has become more pronounced as inflation metrics have proven to be less sticky. December’s consumer price index report will be released on Thursday.


Europe and North America will likely experience shallow recessions this year as their central banks continue raising interest rates, which will weigh heavily on global demand for goods from the Asia-Pacific region.

Given the global economic growth drag, the reopening may not spark a spectacular rebound in China’s economy. Indeed, one cannot rule out the possibility that the economy may contract in the year’s first quarter, given domestic and external difficulties. Hence, without the proverbial proof in the economic data pudding, China’s risk sentiment may have moved too fast, particularly the Yuan.

But a more gradual economic recovery in China may be precisely what the doctor ordered for the global economy, given that most major central banks are still fighting inflation. A supercharged China reopening would drive global commodities markets much higher, to the chagrin of major central banks.

Still, as the pandemic eventually moves into the rear-view mirror, most oil market participants believe that the normalization of domestic and international travel activity will likely have a significant knock-on effect on the crude oil market by tightening the global supply/demand balance. After all, China has already become the world’s second-largest consumer of crude oil (15% of the worldwide total) after the U.S. (20%). And this explains why 2023 forecasts are coalescing around $90 to $100 per barrel for Brent Crude in 2023

Published by Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT