Investors are expecting a Santa Claus rally. The Eurozone economy is close to a recession

Hawkish comments from the Fed on Friday lent support to the dollar. New York Fed President Williams said the question now is whether the bank has sufficiently constrained the economy. That said, talk of a rate cut in March is now premature. Also, Atlanta Fed President Bostic said that policymakers still need a few more months to see enough data to gain confidence that inflation will continue to decline, and he expects the Fed to start cutting interest rates in the third quarter of 2024 if inflation declines as expected.

The US economic reports on Friday dampened hopes that the Fed could provide a soft landing for the economy. Empire’s index of overall business conditions in the US manufacturing sector for December fell by 23.6 to a 4-month low of 14.5, weaker than expected. US manufacturing output for November rose by 0.3% m/m, weaker than expectations of 0.5% m/m. The S&P US Manufacturing PMI for December unexpectedly declined by 1.2 to 48.2, weaker than expected to 49.5 and the weakest reading in 4 months.

The US equity funds stepped up their buying of stocks. Bank of America (BoA) reported that according to EPFR Global, US equity funds received $25.9 billion in the week ended December 13, marking the ninth week of inflows and the longest streak in two years. This indicates that investors continue to invest in the stock market in anticipation of the holiday rally (Santa Claus Rally). Market volatility on Friday was higher than usual due to the expiration of monthly and quarterly options and futures contracts, which is known as the “triple witching.” In addition, many indices rebalanced on Friday. According to Tier1Alpha, about $3.1 trillion in contingent open interest is scheduled to expire or roll over into the new year.

The S&P Eurozone Manufacturing PMI for the decade was unchanged at 44.2, weaker than expectations of a rise to 44.6. The S&P Manufacturing PMI for December unexpectedly declined, falling by 0.6 to 47.0, weaker than expectations of a rise to 48.0. The Eurozone economy continues to struggle and could enter a technical recession in the coming weeks. According to the HCOB, the Eurozone economy is not showing any clear signs of recovery. On the contrary, it has been contracting for six consecutive months. The probability that the Eurozone has been in recession since the third quarter remains very high. If the Eurozone falls into recession and inflation continues to fall, the ECB may have to change course on interest rates and start preparing the market for a series of cuts next year. Swaps tied to ECB meeting dates are predicting a 25 bps probability of an 8% rate cut for the ECB’s January 25 meeting and 57% for the March 7 meeting.

UK inflation data will be released tomorrow. If inflation comes in below forecast, the Bank of England (BoE) will be pressured to consider an earlier rate cut, and this will put pressure on the British Pound in the coming weeks.

Silver prices came under pressure on Friday on concerns over demand for industrial metals after US manufacturing output data for November, S&P’s US manufacturing PMI for December, and Jibun Bank’s Japanese manufacturing PMI for December were weaker than expected.

Asian markets were mostly up last week. Japan’s Nikkei 225 (JP225) gained 0.94% for the week, China’s FTSE China A50 (CHA50) declined 2.01% over five trading days, Hong Kong’s Hang Seng (HK50) jumped by 3.98% for the week, and Australia’s ASX 200 (AU200) added 3.44% for the week.

The Bank of Japan’s (BoJ) monetary policy meeting will take place as early as tomorrow. The Bank of Japan has held the benchmark rate at 0.1% for a decade now, hoping to stimulate investment and borrowing to promote sustainable growth. One goal is to bring inflation to the 2% target. But while inflation is rising, wages have not kept pace, and central bank governor Kazuo Ueda remains cautious about taking major steps at a time of deep uncertainty about the global economic outlook.