Five things to look out for next week

The last trading week before Christmas is an interesting one, it can have thin liquidity as people go away, so expect some fireworks. The central bankers had the limelight last week, this week it’s the economic data that will do the talking. At the part of the economic cycle, bad news really is good news for markets. The best outcome for financial assets and for the real economy in 2023 is that the Fed and other central bankers talk tough on inflation, the consumer gets scared and reigns in spending, then the economy cools under its own weight, without the need for damaging rate hikes around the world. That is the dream scenario right now. Due to this, this is what we are watching next week:

1, UK growth data

The Q3 GDP data is expected to show that the economy contracted by 0.2% in the three months to September, which is expected to be the start of the prolonged recession that the Bank of England is predicting for the UK economy. Sadly, the gloom doesn’t end there: the household savings ratio is expected to fall from more than 7.6% as households need to dip into their savings to pay their bills. The data from the ONS is also expected to show that negative real wage growth is worsening, which will make things tough for households in the coming months. There could be some spots of good news, including with the current account. This is expected to be £20.1bn for Q3, down from £33.8bn in Q2, which is 5.5 % of GDP. A current account deficit of more than 5% is considered problematic, but at least we are moving in the right direction. Confirmation of an improvement in the UK’s current account deficit, should be positive for the pound in the short term, as it is proof of a reduction in the financial risk premium that has been attached to the pound in recent years.

2, US PCE data

The Christmas holidays don’t end until we get the US Core PCE report for November. As a reminder, this is the Fed’s preferred measure of inflation. Thus, it is an important one to watch. It is released this Friday, and the market is expecting a 0.2% increase MoM, with the annual rate rising by 4.6%. If the PCE report is stronger than expected, the Fed will likely need to raise rates for longer. However, we think that the market will absorb a 0.2% monthly increase well if the data matches expectations.

3, US consumer confidence

As we mention above, the market desperately wants the economy to weaken under its own weight and not because it has been forced to by Federal Reserve rate hikes. One indicator of whether the Fed’s tough talk is working will be looking at the Conference Board’s Consumer Confidence index, which is released on Wednesday. If the Fed’s tough talk is working, then US consumer confidence should continue to fall. Estimates are for a reading of 100.8, slightly above the 100.2 reading in November, which was the lowest since July. Remember, bad news is good news, so a less confident consumer is better for risky assets in the long run in the current environment.

4, Natural Gas prices

These have been a key price indicator to watch ever since Russia invaded Ukraine. The Arctic blast in Europe in December was worrying as thoughts turned to possible blackouts and rationing energy to ensure supplies were adequate. However, it looks like the UK and the Continent have managed to get through December well and with minimal disruption. The good news is that temperatures are picking up as we move into the later part of this month, which takes the pressure off supplies. Interestingly, although demand for natural gas soared in December, prices did not, and the whole commodity space witnessed a sell off. This suggests that the market is happy with the supply/ demand balance for now. European energy ministers meet on Monday to discuss lowering the Nat-gas price cap to below EUR 200 per megawatt hour. If this is agreed, it would be a blow to Germany who have urged a cautious approach. Added to this, European governments need to make sure that they are not stoking inflation with these measures and working at odds with the ECB. If that happens, then financial markets may not look on them kindly.

5, 2022 earnings report card

As we move to the end of the year, ex energy, earnings for the S&P 500 are expected to have declined. Analysts expect that earnings declined by nearly 3% in Q4. For 2022, the energy sector is expected to report the highest rate of earnings growth, at a whopping 151.7% compared with 12 months ago. The weakest sectors are expected to be financials, down more than 15% in 2022 and the communications sector is expected to have the second worst earnings decline, with big losses for Meta, Alphabet and Warner Bros. Discovery. It’s been a tough year, and earnings for 2022 are also struggling due to comparisons with 2021, which was a stellar year for earnings growth. The markets have come back down to earth. Lower net profit margins for seven sectors of the S&P 500 is one reason why stocks have fallen sharply in 2022, however, the question now is, is all of the bad news factored in? We still expect the slowdown in the real economy to hurt stocks next year, however, it is worth noting that the earnings comparison to 2022 will be much more flattering for 2023 numbers.