A Week Ahead - Retail, GDP, and Corporate Performance on the Radar

Warren Takunda

Forex

Central Bank

Economic

Summary:

This week, eyes are on key economic indicators worldwide. In the U.S., retail sales, housing data, and Fed speeches take center stage. Major earnings reports from Morgan Stanley, Goldman Sachs, and others are awaited. China unveils Q4 GDP and economic support measures. The UK expects declines in inflation and retail trade. Germany's sentiment and GDP data are crucial. Global economic health is gauged through inflation and retail sales in the UK, Canada, and Euro Area. As markets brace for impact, adaptability is key for investors.

As we embark on a new week, financial markets are poised for a flurry of activity with a keen eye on economic indicators shaping the global landscape. In the United States, the upcoming week is laden with key data releases and corporate earnings that will undoubtedly influence market sentiment.

United States: A Focus on Retail Sales and Housing Indicators

Investors will be closely monitoring the release of December's retail sales figures in the United States, expected to reflect a 0.3% growth rate, mirroring the pace set in the previous month. Simultaneously, the industrial production index is anticipated to hold steady after a 0.2% uptick in November. However, attention will shift to the Michigan Consumer Sentiment report, with indications pointing towards a slight dip in morale for January.

In the housing sector, scrutiny will be on building permits, housing starts, existing home sales, and the NAHB Housing Market Index, providing crucial insights into the health of the real estate market. Additionally, a plethora of economic data, including foreign trade prices, business inventories, capital flows, NY Empire State Manufacturing Index, and the Philadelphia Fed Manufacturing Index, will contribute to a comprehensive understanding of the economic landscape.

With speeches from various Federal Reserve officials, investors will be on the lookout for signals regarding potential interest rate adjustments in the coming year. The earnings season will also gain momentum with reports expected from major players such as Morgan Stanley, Goldman Sachs, US Bancorp, Charles Schwab, PNC, and ProLogis.

China Takes Center Stage, UK and Euro Area Insights

Across the globe, China will command attention as it unveils crucial data, including Q4 GDP growth, retail sales, industrial production, unemployment rates, and the house price index. The outcomes will provide valuable insights into the impact of the economic slowdown and potential measures taken by Beijing to support growth.

In the United Kingdom, economic releases will include inflation, jobs report, and retail sales data. Anticipated decreases in consumer prices and retail trade coupled with an expected rise in the unemployment rate and a slowdown in wage growth paint a mixed picture for the UK economy.

Germany's ZEW Economic Sentiment Index and 2023 GDP data will be closely monitored, offering insights into the performance of the Eurozone's largest economy. Despite an anticipated contraction in the German economy, investor morale is expected to remain relatively stable near a 9-month high.

In Asia, Japan's focus will be on inflation figures, the Tankan index, and machinery orders. Meanwhile, China's data releases will provide a gauge of economic support measures, and in Australia, the Westpac consumer confidence index will take center stage.

As markets brace for the week ahead, the interplay of economic indicators and corporate earnings promises a dynamic and potentially impactful start to the year. Investors are advised to navigate with caution and stay attuned to the evolving global economic narrative.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Kevin Du

Energy

Nuclear power production in France jumped to its highest levels in three years over the first nine days of January, marking an 18% jump in nuclear generation from the same period in 2023, according to power generation data compiled by LSEG.

Higher French output comes just as a cold snap extending from the Nordic countries has lifted regional demand for heating, and has allowed Europe's largest electricity exporter to boost clean power flows to neighboring nations so far this year, data from the International Energy Agency shows (IEA).

France's Nuclear Power Boom May Curb Regional Power Emissions_1

If France's main power provider EDF can sustain high levels of clean power output and exports, utilities elsewhere may be able to limit fossil fuel use in power generation this winter, and potentially avert the traditional surge in power pollution tied to greater heating-related generation.

Reactor Rebound

Extended maintenance issues at key but aging reactors curbed France's nuclear generation to 34-year lows in 2022, forcing power firms to increase fossil fuel use in electricity generation in Europe's most nuclear-dependent power system.

Nuclear output shortages also forced French power firms to sporadically reverse traditional power flows within Europe by becoming net importers, worsening the regional power price crisis in the wake of Russia's invasion of Ukraine.

Engineers worked to restore output through 2023 and managed to lift total nuclear generation by nearly 15% by the end of the year from 2022's stunted total, LSEG data shows.

So far in 2024, France's main power firm EDF has managed to take the output recovery a step further by sharply surpassing output levels in early 2023 and 2022, although production continues to lag 2021's total by around 10%.

Several key reactors require further maintenance work in 2024 due to corrosion issues, but EDF has said it is targeting total nuclear output of 365 terawatt hours (TWh) by 2025, compared to just under 320 TWh in 2023, according to Ember. The company aims to produce 400 TWh of nuclear output by 2030.

Higher exports to limit emissions?

If France's nuclear generation totals remain well above last year's stunted levels for the coming months, the country may be able to sustain its recent high levels of clean power exports to neighbouring nations.

Through Jan. 9, France has been an average daily net exporter of over 12.2 gigawatts (GW) of power, with close to 3 GW heading to Germany and a further 6 GW distributed to Switzerland, the United Kingdom and Italy, according to International Energy Agency (IEA).

France's Nuclear Power Boom May Curb Regional Power Emissions_2

That net export total is nearly 70% greater than over the same period in 2023, when France was a net importer of power from Spain and was forced to constrain exports to key markets such as Switzerland and Italy due to limited domestic output.

And while key economies such as Germany have a total average power demand of around 65-70 GW every hour, the 5-10 GW of power imports the country makes daily do help reduce the strain on domestic power producers.

France's Nuclear Power Boom May Curb Regional Power Emissions_3

Regular clean power imports also help reduce the need for local power firms to use high polluting power sources, such as coal plants, which can be major contributors to regional emissions tallies.

Coal accounted for around half of the European power sector's 1.42 billion metric tons of CO2 emissions in 2023, but generated only 14.2% of the region's electricity.

That means that any measures that can reduce coal's share of the generation mix can result in significant cuts to potential pollution tallies.

France's Nuclear Power Boom May Curb Regional Power Emissions_4

What's more, Europe's power emissions tend to peak during the winter when higher heating demand spurs the region's power producers to increase output from all sources - including coal - in order to meet elevated energy consumption levels.

This year, if France's power firms can keep up the strong pace of nuclear output seen so far, Europe's other power producers may be able to keep coal generation levels in check, and in the process keep a lid on pollution.

Source: Reuters

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ING

Economic

No quick fix for Red Sea shipping risks, impact potentially drags on to 2Q

2023 ended with new disruptions for trade and supply chains following the security crisis in the Red Sea and there's no end in sight yet. To avoid Houthi militant attacks on their vessels in the Gulf of Aden and the Red Sea, shipping companies and their clients continue to avoid the major Suez Canal route - handling some 12% of global trade - and are rerouting their vessels around the Cape of Good Hope.

Sailing around the Cape saves Suez Canal fees but adds some 3,000-3,500 nautical miles (around 6,000 km) to the journeys connecting Europe with Asia. At a speed of 14 knots, this means over 10 days is added to the length of the trip, potentially running up to two weeks.

The disruption has raged on for almost four weeks now, and the US-led naval operation 'Prosperity Guardian' has not yet succeeded in removing threats and providing a corridor safe enough to resume transit. And risks are unlikely to disappear anytime soon amid intensified incidents, the ongoing war in Gaza and associated geopolitical tensions in the Middle East. This is rattling the shipping sector as well as shippers and supply chain partners down the line, and the knock-on effects could take us well into 2024.

What is the magnitude of the forced detours and which flows are most affected?

Vessel crossings nearly cut in half as number of rerouted vessels mounts

From mid-December onwards, shipping companies and their clients and charterers started to avoid the risky Gulf of Aden and Bab al Mandeb sea strait (30 km), which is the entrance to the Red Sea and the route to the Suez Canal. And these numbers are still increasing. In the first week of January 2024, around 220 fewer vessels took this route compared to the previous year (-41%) and the figure is on a downward track, meaning the rerouting of vessels is still mounting. As many ultra-large vessels are among those being redirected, the impact on trade volumes is even bigger (-47%).

Roughly half of the shipped tonnage crossing the canal are containerised goods making it the most important artery for container trade. The trade lane is also a vital corridor for shipping oil and oil products from the Persian Gulf to Europe and the US (some 20-25%).

Container vessels most at risk from Red Sea troubles

Most of the rerouted vessels carry general cargo and particularly containers. Car carriers sailing from Asia are also being diverted, but these make up a small cargo fraction. In the three weeks after mid-December, some 80% of the container vessels on the route have been forced to change course, a level which reached 90% in the first week of January (according to Clarksons). Market leaders MSC and Maersk have diverted over 60 container vessels around the Cape in just three weeks. Other larger container liners, Hapag Lloyd, Cosco, ONE, Evergreen, HMM and ZIM have followed suit. CMA-CGM continues to use the route but is also opting for detours. All in all, this effectively means that 9 out of 10 containers on the Suez Canal route are currently sailing a longer way. As a result, global container capacity depletion could potentially go up by 20-25%.

Tankers continue to sail, but the number is diminishing as risk of assaults comes at a cost

Most tankers are continuing their journeys, but this doesn't mean the tanker market is not affected by the threat of attacks on vessels. Spot rates, including those for very large crude carriers (VLCC) chartered on this route from the Persian Gulf, are under strain. And in the meantime, insurance market premiums for Red Sea crossings have surged.

So different from what some may think, the Red Sea - Suez Canal shipping route isn't blocked, but it is certainly increasingly affected.

What are container rates doing? And why are they up this much against the backdrop of excess capacity in container shipping

Container rates on most effected Asia-Europe route more than tripled while the global average doubled

Container spot rates on one of the largest and most affected global trade routes, Asia-Europe, have tripled compared to early December in the first week of January. This marks the provisional end of downward trending prices after earlier record-breaking levels during the pandemic. Spot rates, including surcharges on the Shanghai-Rotterdam route, reached $ 4,400 on 11 January compared to $1,170 at the start of December for a standardised 40-foot container. Most trade lanes across the world are indirectly affected, and global spot rates have doubled over the same period. Several US east coast-bound vessels from Asia have shifted away from the Panama Canal, which is suffering from a drought, and are now also impacted by the troubles in the Red Sea. This comes on top of already extended sailing times.

Container rates rebounded quickly and more may follow

Container sport rates have gone up rapidly following the capacity disruption and rates may go up even further. But we are still far away from the record-breaking levels of early 2022. Current spot prices still hover below half of this peak for the Shanghai – Rotterdam route.

A complicating factor for the market is that the world simultaneously faces another chokepoint – the Panama Canal – also a vital link for trade, and the coinciding Chinese New Year may lead to extra friction this year. But on the other hand, demand for goods is running far less hot than over the pandemic, and with a range of new-build vessels online and still underway there's much more capacity available. In addition, port operations are generally also running relatively smoothly.

Red sea crisis in a different category for shipping than the pandemic disruption

The current market balance of supply and demand is less strained than when Evergiven blocked the Suez Canal in 2021, which should limit the upside for container rates.

Having said that, the impact ultimately depends on how long it takes to resume shipments. Rebalancing takes time as we have seen before. If extreme weather events add to the disarray, elevated freight rates could easily be around for longer. But the current disruption also masks underlying overcapacity following a massive inflow of vessel capacity. When the most pressing Red Sea disruption is resolved we can gradually expect renewed downward pressure.

Mounting surcharges complicate the market

The container shipping sector is subject to various surcharges on top of base freight rates and several of them, including the bunker adjustment (BAF) and from this year the Emissions surcharge (EMS) are covered by clauses in contracts. But the list of surcharges has continued to expand in response to several events in the last few years. Port congestion surcharges (PCS) were introduced over the pandemic and amid the current Red Sea crisis, container liners have implemented 'transit disruption charges' (TSD). This extra fee, combined with a peak season surcharge ahead of the Chinese New Year (PSS), has pushed up container rates. These fees differ among container liners but have become a dominant factor in pricing. Consequently, container transport pricing has turned increasingly opaque and hard to predict for shippers and logistics services providers.

What is the impact of the Red Sea crisis for shippers and consumers?

Shipping costs up again and delays hit consumer markets in subsequent months

Container vessels predominantly carry finished consumer goods, and semi-finished products are most impacted by the disruption. An estimated 30% of the world's traded consumer goods are shipped through the Suez route. Higher transport costs obviously raise costs for shippers, but how they are affected depends on specific contracts although surcharges may hit them even if they have term-contracts.

Shipping costs usually make up a small fraction of total sourcing costs per product. For lower valued or voluminous products this could, for instance, make up around 5%. If prices double or triple, this raises total costs by 5 or 10%, but we've also just gone through a prolonged downward cycle after the pandemic highs. Unless the current disarray lasts longer than expected, the impact on consumer prices may be limited (for now).

Mounting delays of detoured vessels arriving in ports are resulting in increased uncertainty for shippers and handling pressures at terminals. Delays could also spark port congestion and hit the turn-around trip as well as connected journeys. The disruption leads to short-term mismatches between supply and demand and imbalances in the availability of vessels, personnel, and empty containers, and this needs to balance out again. With the Chinese New Year approaching and vessels returning to Asia too late, leading to cancellations. This will likely impact most of the first quarter and potentially the second quarter as well. For time-sensitive deliveries not yet underway, shippers may opt for shipment through the air, but this is much more expensive.

Altogether, this could mean some products will arrive later on the shelves if stocks are depleted, as companies like IKEA have warned about. In any case, questions about reliability lead to challenges in terms of fulfilling demand on time, and it reminds shippers that building resilience in supply chains remains vital.

What does it mean for the profitability of container liners?

Container liner profitability expected to recover in 1Q

Only part of the price increases can be attributed to higher fuel and wage costs, which means container liners will benefit from the sudden mismatch and imbalances between demand and supply, as we have seen previously. Profits skyrocketed in 2021 and 2022. But container rates plummeted in 2022 and trended down over most of 2023, even dropping below pre-pandemic levels last autumn. With locked-in higher contract rates expiring, elevated profitability levels have been declining since the second half of 2022. This continued over 2023 with some liners approaching break-even in the third quarter and ZIM even encountering negative levels. With the current price hikes, profitability is likely to turn a corner, and we may see margin improvement either in the fourth quarter or by the first quarter of 2024. Red Sea Shipping Disruption Rages on And the Impact Will Continue Well Into 2024_4

Red Sea Shipping Disruption Rages on And the Impact Will Continue Well Into 2024_4

What about the impact on trade?

New inefficiencies but trade unlikely to be derailed

Global trade has entered a phase of low growth following economic headwinds, geopolitical tensions and increasing protectionism. Trade growth may even lag global GDP growth for longer than expected. Trade patterns have also been disrupted over the last two years following sanctions on Russia, which led to big shifts in imports and exports of commodities and vessels sailing longer routes, especially in tanker shipping. Current detours add to already historically long routes in trade and introduce new inefficiencies. Falling container rates have long been positive for trade since 2022, and current increases reverse some of that, but as mentioned previously rates and ocean timelines for shipments are nowhere near peak levels. Shippers are looking into options for shift sourcing and nearshoring to reduce risk, but we've also seen that (underlying) interdependencies remain strong and companies continue to trade if potential benefits surpass costs. All in all, we stick to our forecast that merchant trade will grow 2.5% year-on-year in 2024 compared to the low competitive base of 2023.

To stay updated on all economic events of today, please check out our Economic calendar

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Chandan Gupta

Stocks

Traders' Opinions

Fundamental Analysis

The Dow Jones Industrial Average had its own little momentum, initially revving up but slamming the brakes later in the day. Why the sudden U-turn? Blame it on the PPI number, which turned out weaker than expected.

Traders were all ears, hoping for a sweet deal on monetary policy after the initial announcement. There was a buzz in the air about rates dropping, and for a moment, it seemed like a possibility.

But reality hit, and we found ourselves in a pullback situation. The culprit? The notorious 37,500 level, throwing a hefty dose of resistance into the mix. It's like that tough opponent you just can't seem to beat – a real head-scratcher.

Now, in the midst of this pullback drama, there's talk of value lurking in the shadows. Some speculate the Dow Jones might take a stroll down to the 37,000 level, and that's a zone worth keeping an eye on. It's like spotting a sale sign in your favorite store – an opportunity worth exploring.

But, and there's always a but in the world of finance, this market is a symphony of noise. It's like trying to have a quiet dinner in a bustling restaurant – not easy. So, caution is the name of the game when it comes to sizing up your position. You don't want to be caught in the whirlwind of volatility without a safety net.

Here's the deal – selling the Dow Jones Industrial Average? Not on the table anytime soon. With the massive stimulus spending injecting life into U.S. infrastructure, it's like fuel to the fire. Some reckon it's only a matter of time before these stocks get their wings and soar to the upside.

In the grand scheme, this Dow Jones tale is a reminder that in the ever-evolving market, surprises are par for the course. It's a wild ride, but with a keen eye for value and a dash of caution, you might just navigate through the twists and turns and come out on top. So, buckle up, keep an ear to the ground, and remember – in the world of finance, every dip can be a chance to dive into potential opportunities.

Technical Analysis

The Dow Jones, a bit like a seasoned traveler, could use a pit stop before gearing up for the next leg of the journey. The magic number to break? 37,800. If we can crack that code, the market might just set its sights on the golden 38,500 level. It's like leveling up in a video game – a new high to conquer.

But, and there's always a but in finance, let's not ignore the speed bumps. If the Dow decides to take a detour south of 37,000, it could be signaling a potential journey down to 36,500. Now, here's where the 50-Day EMA swoops in – like a supporting actor in a movie, coming into the picture at just the right moment.

Now, me? I'm in the business of buying pullbacks. If the market decides to throw a sale, count me in. I'm eyeing substantial value, and a massive pullback? Well, that's like finding a rare gem on the discount rack – an opportunity too good to pass up.

In this Dow Jones saga, it's a game of patience and strategy. Like playing chess, each move matters, and being a buyer of pullbacks is a strategy worth considering. So, as we navigate this financial landscape, keep an eye on those levels, stay nimble, and who knows – the next move might just be the one that puts you ahead in the game. After all, in the world of finance, every dip is a potential chance to scoop up some value. Dow Jones Industrial Average Faces Retraction Today_1

Dow Jones Industrial Average Faces Retraction Today_1

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Alex

Bond

Economic

The positive correlation between U.S. stocks and bonds is the strongest in years, if not decades, and whether it lasts hinges on just how the economy touches down this year.

There is no clear agreement on how the "hard," "soft" - or even "no" - landing scenarios are defined, so it is reasonable to assume that the path for stocks and bonds in the three eventualities is fuzzy too.

That's especially true of the "soft" and "no" landing scenarios. A "hard" recession, large-scale job losses, severe credit tightening and market volatility would almost certainly be an environment in which safe-haven U.S. Treasuries rise in value and Wall Street stocks head south.

In this scenario, the correlation between stocks and bonds will quickly turn negative. But - right now - it's also seen as the least likely of the three outcomes to play out.

Many economists have scrapped their recession calls entirely, the economy is still creating jobs, growth is expected to chug along at around a 1.5%-2.0% pace this year, and corporate earnings growth forecasts are still tracking above 10%.

Analysts at SMBC Nikko Securities note that the correlation between rolling 12-month returns on the S&P 500 index and Bloomberg Treasury index is the highest since 1997 and one of the strongest in more than half a century.

This positive correlation has been a puzzle for a while. Some analysts essentially boil it down to the ebb and flow of global liquidity, particularly since 2008 - all boats are lifted by the whooshes, and beached by the drainings.

But history shows this correlation often snaps back pretty quickly when it reaches extreme levels.

US 'Landing' Key to Stretched Equity/Bond Correlation_1

Deutsche Bank's Jim Reid also warns that the tight relationship between stocks and bonds is typically unstable and can flip very quickly.

"So enjoy the easy trading correlations for now with the full awareness that it will likely change before too long!" Reid wrote on Wednesday.

Of course, many economic and market rules of thumb that investors turned to for guidance have been upended by the Great Financial Crisis and the COVID-19 pandemic. Is this another one?

'Softish' landing?

It's easy to envisage that correlation reversing quickly in the event of a hard landing. It's less easy to envisage what the potential implications of the other two scenarios are.

Some might argue that a soft landing will support equities and bonds - growth slows but the economy skirts recession, unemployment drifts higher but is nothing disastrous, and inflation comes back down to the Federal Reserve's 2% target, which allows the U.S. central bank to cut interest rates.

That's the textbook definition of a soft landing - raising rates to cool an overheating economy or inflation without triggering a recession - but it has only been achieved once in the Fed's history, in the mid-1990s.

But it's not the only definition.

In a paper last year, former Fed Vice Chair Alan Blinder said simply avoiding recession is too narrow a parameter. He argued there have been five "softish" landings after the Fed's last 11 hiking cycles going back to the 1960s.

Stuart Kaiser, head of U.S. equity trading strategy at Citi, expects the long-term correlation between the S&P 500 and the 10-year Treasury bond to turn negative, which is what the relationship was for most of the 1997-2021 period.

US 'Landing' Key to Stretched Equity/Bond Correlation_3

A soft landing can encompass a mild recession, an environment in which stocks are unlikely to perform well even if the contraction in growth and rise in unemployment is short-lived.

Kaiser believes a "no landing" scenario would be positive for stocks because investors will view higher Fed interest rates and bond yields as a consequence of stronger growth more than high inflation or unanchored inflation expectations.

However, it is also possible that a "no landing" scenario isn't particularly supportive of stocks if investors are forced to price out most of the 150 basis points of Fed rate cuts currently baked into the 2024 futures curve.

"There's a lot of nuance in the "landing" terms, but for us strong growth is good for stocks unless it creates another inflation cycle," Kaiser says.

"And even in that case I'd expect stocks to initially respond positively until or unless inflation really accelerates higher," he notes.