U.S. equity market finished with gains last week on signs that the Federal Reserve will slow the pace of monetary tightening in December. However, the S&P 500 has opened the week on a negative note as China’s angry anti-COVID zero policy protests swept the country and supressed global equity markets. Investors are realising such event could impact global growth and concerns about China have hit the rally.
Black Friday sales, inflation data, consumer confidence, the government second estimate for Q3 GDP are due this week; however, the main highlight will be the keynote speech from Fed Chair Jerome Powell on the economic outlook and the labour market on Wednesday, and the Nonfarm Payroll report for November on Friday.
Fed Chair Powell is expected to deliver a hawkish policy message pointing to the likelihood of slowing the pace of rate hikes, but warning that rates are likely to rise to a higher peak than previously planned. Another pushback against the premature easing of financial conditions appears likely, given that inflation remains uncomfortably high.
The Nonfarm Payrolls will be the last jobs report before the Fed’s final meeting for the year. Investors will be looking for signs if the U.S. economy is beginning to bear the weight of the Fed’s aggressive monetary tightening, as they grasp the worsening trade-off between fighting inflation and the damaging consequences of this year’s aggressive rate hikes.
Expectations that the Fed will soon slow the pace of rate hikes were boosted by last week’s minutes from the central bank’s November meeting and Friday’s U.S. jobs report will test those expectations. Economists are expecting the U.S. economy to have added 200K new jobs vs. 233K the prior month, which would be the smallest increase in two years. Growth in average hourly earnings is likely to start moderating, while the unemployment rate is expected to remain unchanged, just above its 50-year low at 3.7%. However, for the year ahead economist see unemployment potentially rising to 5%.
The turbo-charged rally from the October 2022 low might be approaching a turning point as it becomes clear that getting inflation back down to the Fed’s target rate of 2% may mean the central bank might be hiking into a recession. The Fed has been on its fastest interest rate hiking cycle since the early 1980s, reiterating that the policy rate needs to rise to at least 5% to bring down inflation. We are of the view that the market has not bottomed yet and equities have room to fall further in the coming months as the deteriorating macro-outlook might not be fully priced in.
Overall, it appears markets have not priced in an imminent recession, ignoring the likelihood of the Fed keeping interest rates above 5% throughout 2023 to succeed in taming inflation. Will the market have a better 2023 or we are in a countdown to a recession is yet to be seen, but our baseline scenario remains unchanged, leaning in favour of another significant leg down in equity markets. We look beyond the prospect of fireworks and Santa rally and take a medium-term view on what is likely to unfold in the markets in the months ahead.
Astute traders looking for magnified exposure to U.S. equity markets may consider our 3x Long US 500 and/or 3x Short US 500 ETPs.
Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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