Investors will have little time to ease back into the swing of things with a full slate of labor market data to digest. The week's main event will be Friday's employment report for December; however, given the absence of Fedspeak since the December FOMC meeting, Wednesday's minutes from that meeting will also be a keen policy plot developer.
After a painful year, it was only fitting that US stocks traded lower Friday to remind everyone just how much of a stinker 2022 was after vitality and optimism fueled by pandemic stimulus gave way to the weight of excess valuation.
Now that the cost of money is no longer next to nothing, the increased cost of capital has translated directly into lower equity valuation.
And as we step into 2023, the drivers of high inflation persist, although the markets absorb these issues better than they did a year ago.
But the inflation baton has been passed to services, a segment of the economy that history suggests is much tougher to wring out of the system. Hence, it may not be a "stretch call" to assume headline and especially core inflation trends to remain far north of 3% by the end of 2023, simply too high for central bank comfort.
And as for monetary policy, if inflation stays well above trend, as many expect, the main story could be that there will be no scope for rate cuts in the year ahead; however, on a less hawkish note, the Fed may stop raising rates as early as March 2023 for policy-lagged effects to settle in.
However, with the markets likely lathered in an extended period of recession fright, 2023 is unlikely to be a bountiful environment for index huggers. Still, it could be fruitful ground for cagey stock pickers.
CHINA DATA
In China, the NBS manufacturing PMI decreased far more than expected in November on Covid disruptions and dampened demand.
The good news, however, is the data reinforces the market lean that a stimulus dump is on the way after the pro-growth stance at the Q4 PBOC MPC meeting,
That said, Investors may be cautious that the lack of back-to-work liquidity could amplify any sell-off, effectively transforming a mild New Year hangover into a significant downswing.
OIL MARKETS
China's bumpy reopening will return to stable growth as assuredly as after winter comes spring,
Traders are still deciding which reopening (as defined as the total end of dynamic zero-Covid policy) playbook to follow for China, Eastern, or Western fashioned. In optionality, this is where a good chunk of volatility sits.
On a western style reopening where economic activity accelerates right out of the gates, we could see oil quickly move to Brent $100 bbl; however, its equally possible growth may soften during the early stage of reopening, similar to the experience of several East Asian economies that previously implemented relatively tight Covid controls. Hence in that scenario, Brent oil ascendancy could be more muted, but a more back-loaded positive "reopening impulse" in Q2 could then takes us up to Brent $100 bbl.
Given the weaker China NBS PMI data released over the weekend, that would suggest a more sluggish reopen playbook and could trim some of the pre-New Year froth from the current rally. Still, with the PBoC already taking proactive short-term cash influx measures as the economic dumpster fire rages, ongoing policy measures and expectations of a future stimulus dump could be a critical offsetting factor,
Just as commodity markets faced a significant headwind from the stronger US dollar in 2022, the weaker US dollar expectation could provide a substantial tailwind for oil markets. Where it is already starting to affect commodity markets, using glittering gold as an example positively
FOREX MARKETS
FX traders see scope for the euro to run with the G-10 currency baton in 2023 as Europe successfully transitions its economy further away from Russian energy dependence.
Increasing clarity about the end game on global inflation/rates, China reopening, and the fallout of geopolitics on energy prices are key factors to watch for Asia FX.