22 February 2024
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This week is going to be great or scary for stocks!

Peter Switzer
12 December 2022

For someone like me and anyone who wants their portfolio of stocks or their super to grow rolling into 2023, there’s a dramatic week for stocks ahead. By late this week we will be either cheering with relief or lamenting what might lie ahead.

There is also a back story related to all the above and that’s about how many more interest rate rises we have to endure and the likely threat of recession here and in the US.

Let’s start with the big market-driving dramas of the week.

The first is the US inflation reading out on Tuesday, their time. We’ll react to that number on Wednesday’ Let’s try to work out what kind of result would be seen as good or bad. The October number came in at 7.7% and was seen as a good result, so a low 7% or a high 6% reading would be a great tonic for Wall Street but another 7.7% number or higher would KO stocks.

Last week the Yanks got their latest PPI or Producer Price Index and it was a little hotter than was hoped. Looking at those numbers, Art Hogan, chief market strategist at B. Riley, New York said: “When you look at the year-over-year numbers, we’ve now gone down. So directionally, inflation is heading in the right place but sequentially, it disappointed expectations. So to me, this is a modest disappointment. We’ll get more information on Tuesday with the CPI. I don’t believe this changes anything about what the Fed was going to do on Wednesday in terms of raising rates by 50 basis points. The next big concern that we’ll have and would learn more about at the (Fed) meeting on Wednesday is that the terminal rates for the Fed funds may nudge higher from 4.75% to 5%, which is the range of consensus now, to 5%-5.25%.” (Reuters)

On the other hand, if the Consumer Price Index on Tuesday surprises to the downside, Wall Street and the Nasdaq in particular will love it and we could see what I’ve called “the mother of all Santa Claus rallies” unfold before Christmas and even beyond.

Making this all even more dramatic is the fact that the Federal Reserve gets to see these inflation numbers and then has to decide what to do with interest rates. The market expects a 0.5% rate rise, following six rises this year, where four in a row of these hikes were a whopping 0.75%!

If the inflation number on Tuesday is a shocker, the Fed could do a 0.75% rise, which would decimate stocks, or it could promise a lot more rate rises ahead, and that too would hurt stock prices.

Did I say this could be a dramatic week?

Of course, if the number is better than expected, we could be off to the races, with more stock price rises expected for 2023.

But wait, there’s another dramatic twist and that’s the fear of recession!

If inflation is falling quicker than expected, then some would worry about previous rate rises setting the US up for a recession. On the other hand, if the inflation number is too high, the thinking could be that more rate rises will be necessary and that too could cause a recession.

This is why this week will be oh, so dramatic!

On the local front, we see business as well as consumer confidence data,  purchasing managers info and the latest employment/unemployment readings, which all tell us about how our inflation is tracking and how high interest rates will go.

The market and economists think two more rate rises of 0.25% are likely in 2023 but the CBA tips one and AMP’s Shane Oliver thinks maybe rate rises are over!

It’s only a maybe and it will partly rest on the data story that comes out this week and over January before the RBA meets on the first Tuesday in February.

This is going to be a big week for me and people like me. Let’s hope we get a nice Christmas present from the statisticians here and in the US.

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