Asia open insights: A clash of economic perspectives in focus

Markets

Investors abruptly slammed the brakes on the year-end Santa rally, opting to cash numerous chips following the market's recent robust performance. The shares of FedEx, often regarded as an economic barometer, took a hit after disappointing results. Simultaneously, investors were digesting an exuberant consumer confidence survey that exceeded expectations.

FedEx emerged as the most significant decliner in the S&P 500, experiencing a loss exceeding 10%. The package delivery giant delivered a less-than-encouraging revenue outlook for the fiscal year and reported fiscal second-quarter results that fell short of expectations on both the top and bottom lines.

In contrast, an index reflecting American consumer sentiments about current and future economic conditions climbed to 110.7 in December, surpassing the anticipated 104.5 predicted by economists polled by Dow Jones.

Considering these two market observations together (FedEx vs. Consumer Sentiment) suggests a clash of economic perspectives.

While the disappointing FedEx results provide ammunition to the overtightening hard landing camp, the consumer's positive outlook on sentiment, diminishing inflation expectations, and a more optimistic perspective on the labour market strongly support the narrative of a soft landing, even though one could argue that the upturn in confidence poses a potential risk of reigniting inflationary pressures. However, one could argue that the upturn in confidence poses a potential risk of reigniting inflationary pressures.

The better-than-expected performance in both existing home sales and consumer confidence seems to have counterintuitively rekindled “good news is bad”. This has seemingly triggered momentum speculators to capitalize on holiday thin liquidity, opting to smack the market lower in an attempt to deliver a lump of coal into investors’ holiday stockings.

All said, the S&P 500 closed down 1.5 %, and now folks may need to decide if the market is just taking a breather, running out of gas or cooking up something more toxic.

That being said, markets are likely trimming risk as attention shifts to tomorrow's U.S. Personal Consumption Expenditures (PCE) inflation report. The tug-of-war between the Fed and market-implied rate cut pricing could be swayed by evidence in the inflation data. This week's PCE inflation figures hold the crucial tarot cards likely to steer market dynamics into year-end and beyond.

The upcoming U.S. Personal Consumption Expenditures (PCE) inflation data on Friday holds significant importance as the last key data point of the year. An upside surprise in the figures is crucial to bolster the credibility of the Federal Reserve's efforts to push back against market rate cut expectations. Failure to see an upside surprise could challenge the Fed to counter expectations of a rate cut in March. In such a scenario, risk assets could rebound, and the year-end rally would likely regain momentum, especially with $6 trillion in dry powder parked in Money Market Fund garages yet to be deployed.

The challenge for the Federal Reserve is that countering the idea of a March rate cut will become increasingly challenging if inflation readings continue to decline more rapidly than anticipated. In such a scenario, investors may grow concerned that the Fed has overtightened, leading to a further depression of yields. The Fed's rhetoric against a March rate cut will only influence investor behaviour if supported by data indicating a need for such action.

Oil markets

The recent trading session unfolded as a mixed and relatively low-liquidity scenario, marked by a notable shift in petroleum contracts from their intrasession peaks. This adjustment coincided with the release of the U.S. Energy Information Administration (EIA) report, revealing a significant uptick of 9.5 million barrels (bbl) in total oil and petroleum product supplies over the past week. A noteworthy milestone accompanied this surge, as domestic US oil production reached a new record high of 13.3 million barrels per day (bpd).

The prevailing understanding of the Red Sea risk is that if significant production remains unharmed, the price dynamics will likely adjust by accommodating the additional shipping burden of 8.8 million barrels per day (bpd) via longer routes. The current perspective is that the Houthis, while disruptive, pose more of a nuisance than a substantial escalation threat. This assessment holds, especially in the absence of involvement from other Middle East actors, which would significantly alter the situation. In essence, the market seems to factor in a small risk premium, reflecting the perception that the Houthis' actions, at this point, do not represent a major escalation that would significantly impact overall production or disrupt major supply routes.

While the market is still headline choppy, prices seemingly gravitate into a rangebound price-to-perfection scenario.