MARKETS
With Wall Street denizen still peering down the economic rabbit hole at the start of the year that the Chinese calendar aptly named the year of the rabbit, markets continue to price in what could be a black swan for most market analysts as the Fed could be on course to soft land the economy.
US stock markets have recovered a good chunk of the intersession losses. They are on pace for a sizable surprising win for the week as investors continue to digest better growth in Europe and China, decelerating inflation in the US, and an improving backdrop for the Fed to ratchet back on rate hikes in the months ahead.
But like in Legoland, in this 'Everything is awesome!' environment, the US stock market outlook may still be cratered with unavoidable potholes.
The biggest red flag: buying stocks on the premise of weak inflation is a contradiction in terms; the reality is disinflation will now actually begin to unwind much of that corporate earnings pricing power gain at a time when consumers are becoming frugal on non-essential items as excess pandemic savings evaporate and valuation remain a big overhang as we step into 2023.
Stocks in Asia traded higher Friday, getting a boost from the benign US inflation report on Thursday. Japan bucked the trend, however, with the Nikkei losing more than 1% as 10-year JGB yields breached the 0.5% threshold amidst investor skepticism that the BoJ will sustain yield curve control.
US markets are closed Monday for Martin Luther King Day, but the rest of the week will be focused on earnings season with a continuing swath of Banks and Credit Card companies set to report, plus a slew of non-Financials, including NFLX, PG, SLB, PPG, UAL, and JBHT -- all of which should give us a good picture of how Corporate America held up in the last quarter of 2022
COMMODITIES
If you have not noticed, this is no normal cycle, and some of the standard playbook assumptions will not work this time. Despite the cooler global economic outlook, the peculiar oddity is that commodity prices are holding up well, supported by China's policy U-turn amid a more growth-friendly Politburo, a softer US dollar outlook and green energy demand for some commodities.
For oil prices, specific supply considerations, such as the Ukraine conflict or OPEC's determination to keep crude prices firm, provide significant price planks; indeed, the OPEC put is still alive and well.
The latest oil price recovery is a particularly notable development, which at the very least, raises some doubts about the talk of a global recession.
FOREX
Japan will also be in the spotlight with the BoJ's decision on Wednesday and the CPI release on Thursday as markets try to time a shift in the central bank's monetary policy amid concerns about price pressures. At a minimum, markets are pricing in a further tweak on YCC. The Yen continues to strengthen on the expectation that the big pile of US dollar cash Japanese investors are sitting on offshore will soon start to re-shore