Investors await key U.S. economic data and Federal Reserve insights, as market sentiment predicts rate cuts and concerns of a potential recession. Updates on factory sector, FOMC minutes, December jobs report, and ISM service sector index.
Troy D. Hanson
December 30, 2023
Investors and economists are eagerly awaiting the upcoming week for key U.S. economic data and insights from Federal Reserve speakers. This data will provide valuable information to test the markets' belief that interest-rate cuts are imminent in 2024, starting in March.
Market sentiment in derivative markets suggests that traders are now expecting a substantial 150 basis points of benchmark rate cuts in the next year, according to the CME's FedWatch tool.
Despite some speculation that the factory sector may have reached its lowest point, experts predict that the upcoming data will continue to disappoint. Economists anticipate that the headline index will remain below the critical 50.0% mark, indicating contraction, for the 14th consecutive month in January. The consensus among economists surveyed by the Wall Street Journal is a slight improvement from 46.7 in the prior month to 47.3 in December. If this forecast proves accurate, it aligns with the expectations of many economists who anticipate a significant slowdown in the economy during the first few months of the year, fueling concerns of a potential recession.
On another note, the Federal Open Market Committee (FOMC) minutes from the December 12-13 meeting will be released on Wednesday at 2 p.m. Eastern.
Stay tuned for these crucial updates that will undoubtedly shape the economic landscape in the coming days.
Market Reaction to Fed Meeting
The markets experienced a significant reaction following the December Federal Reserve (Fed) meeting. Fed Chairman Jerome Powell's mention of the possibility of cutting interest rates at the meeting, along with the officials' projection of three quarter-point rate cuts in 2024 instead of two, had a notable impact. Despite subsequent attempts by Fed officials to calm the market and suggest that it may have overreacted to the "fed pivot," their efforts have been ignored. Sal Guatieri, a senior economist at BMO Capital Markets, expressed hope that the minutes from the meeting would provide a clearer understanding of the Fed's strategy.
December Jobs Report
Friday, 2 p.m. Eastern
Economists predict that the labor market will lose some of its strength in December, with an expected increase of 170,000 jobs compared to the previous month's 199,000. The unemployment rate is also expected to rise slightly to 3.8% from 3.7%. Wage gains are projected to cool down slightly to 0.3% after a solid 0.4% increase in November.
If the data aligns with these expectations, it will be consistent with the moderation in GDP growth observed in the final three months of 2023, following a strong annual growth rate of 4.9% in the previous quarter.
Stephen Stanley, the chief U.S. economist at Santander, suggests that a stronger jobs report would indicate that rate cuts may not occur as quickly as the market anticipates.
December ISM Service Sector Index
Friday, 10 a.m. Eastern
Economic Outlook: Service Sector Shows Resilience Amidst Pandemic
Despite the ongoing challenges posed by the pandemic, economists forecast that the headline index will continue to indicate expansion in the service sector in December. The index is projected to slightly decline from 52.7 in the prior month to 52.5, signifying a sustained positive outlook.
In comparison to the manufacturing sector, which experienced multiple months of contraction throughout the height of the pandemic in spring 2020, the service sector has exhibited remarkable resilience. It had only one month of contraction during that period, underscoring its ability to adapt and withstand the unprecedented circumstances.
This data highlights the crucial role played by the service sector in driving economic growth and stability. As we navigate these uncertain times, it is encouraging to see this sector maintain a steady course, contributing to overall economic recovery.