Investors regularly search the Internet for the Santa rally as we head into the final trading days of the year. This time around, the term ‘recession’ is being searched the most since 2011 according to Google (NASDAQ:GOOGL) trends. Fears of a recession ahead of us explains the roller coaster ride in equity, credit, and other financial assets over the past couple of weeks. Unfortunately, these threats are not coming out of thin air.
Economic data is clearly indicating a worsening outlook, particularly figures from Europe and China. A key leading indicator, IHS Markit's Flash Eurozone Composite PMI slumped to 51.3 in December. This was below most pessimistic forecasts and the weakest expansion in the private sector in four years. Meanwhile China, which has been relying on local consumption to boost its economy, saw its retail sales growing at their weakest pace in 15 years. Political concerns are also a key factor to consider, whether it’s Trump’s trade policies, Brexit, the yellow vest movement, or geopolitical tensions in the Middle East and elsewhere will all keep investors on the defensive.
This week will be the last interesting one for the remainder of the year with multiple risk-events including tier-one economic data and monetary policy decisions.
The Federal Reserve meeting this week is what investors will be monitoring very closely. A final key rate hike for 2018 is almost a done deal, but what is more important is how the Fed’s dot plots shift in 2019 and beyond. If US monetary policymakers are seeing a serious risk of economic slowdown, those dots should be pulled downwards. The statement needs to be more balanced between slight optimism and a willingness to react fast, in case recession fears materialize. Fed Chairman Jerome Powell is likely to be faced with many questions about the threat of a US economic slowdown especially given the inversion of the yield curve recently. Investors need to be reading between the lines to understand what the Fed’s position is at this stage.
The Bank of England and Bank of Japan are also meeting this week, but both are likely to be non-events. In the UK it’s all about Brexit and the BoE can’t make any new decisions until the political clouds clear. Meanwhile in Japan, monetary policy still seems far from tightening given the latest contraction in its economy.
On the data front, there are inflation figures from the EU, UK, Canada and the US. Final US GDP numbers will also be released this week with other data including durable goods orders, existing home sales, housing starts and building permits. Further weakness in the US housing sector is likely to add to concerns of economic slowdown in the year ahead.
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