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Can US Data Bring Back Risk Appetite

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Yesterday, markets took on a decidedly risk-off attitude through early trading. Some of that was recovered by the evening. But corporate reports were providing investors with plenty of reason to pause. Microsoft was one of the larger firms to contribute to pessimism, as it reported slower growth in its enterprise software division. That implies that many companies were cutting back spending, and weren’t seeing the need to expand.

The slowing economy narrative weakens the dollar, in large part due to Fed expectations. If the US does tip into a recession at the start of the year, it’s speculated that the Fed won’t hike as aggressively, and could even start cutting. After a series of negative corporate reports, the US will provide a series of key data points that could move the markets. The question is whether the data will contribute to the building pessimism, or will it support the case for growth? Can the dollar rebound from here?

US Durable Goods Orders

Durable goods orders is one of the key indicators for an economy’s economic outlook. It measures how much major companies are investing in the long-term. If the economy is doing good, typically businesses are eager to invest to increase profits in the future. But if there is economic uncertainty, businesses will hold back on longer term investments to keep capital to weather a downturn.

US December durable goods orders are expected to increase by 2.2%, a reversal from the -2.1% reported in November. That would contradict some of the industrial data that has come out in recent days, and could provide some optimism. If the figure disappoints, however, it could add another datapoint to the narrative of a coming recession.

US Core PCE Price Index

Core PCE is the preferred inflation measure used by the Fed, and can have a bigger impact on monetary policy expectations than CPI figures. There has been increased focus on core price changes as the falling cost of energy filters through the economy.

December Core PCE Price index is expected to show a monthly increase of 0.1%, down from 0.2% prior. On an annualized basis, that would be a tick down to 4.6% from 4.7%. A beat in this measure would likely raise expectations of more tightening by the Fed in the near term. At the moment, over 90% of economists expect the Fed to hike by 25bps next week.

US Personal income and spending

The consumer is the driver of the US economy, making these indicators key for expectations for how the economy will perform. Inflation has been eating into disposable income and real wages falling for months, leading to depressed demand. It should be noted that the BLS doesn’t adjust for inflation in this statistic. Monthly inflation for December was reported at -0.1%.

December Personal income is expected to have grown 0.3%, down from 0.4% in November. But when factoring in inflation, that would be a similar growth rate. Personal spending, on the other hand, is expected to decline -0.1% compared to 0.1% in November.

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