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Westpac Leading Index in Australia showed an encouraging rise from -0.39% to 0.30% in November, marking the first positive, above-trend reading since mid-2022. However, Westpac cautioned that this uptick might be influenced by temporary factors. Also, the shift in underlying momentum, as RBA's tightening begins to slow, is seen more as a stabilization rather than the start of an upturn.

Further, Westpac highlighted weaker conditions in the domestic sphere, particularly impacting the household sector. This weakness is expected to continue into the first half of next year. Hence, Westpac anticipates that barring a "truly disastrous" December quarter CPI update, RBA is likely to maintain its current policy in the upcoming February meeting.

Full Australia Westpac leading index release here.

Japan's trade statistics for November were, marked by a slight decline in exports and a more significant drop in imports. Exports fell marginally by -0.2% yoy, totaling JPY 8829B, marking the first drop in three months.

A closer look at export destinations shows contrasting trends. Exports to US continued to grow, marking a 5.3% increase and extending the expansion streak to 26 months. In contrast, exports to China fell by -2.2%, continuing a downward trend for the 12th consecutive month. One of the most notable declines was in food shipments, which plummeted by -60.3%, significantly impacted by China's ban on Japanese seafood imports.

On the import side, Japan saw a more pronounced decline of -11.9% yoy, with total imports amounting to JPY 9597B. This reduction in imports contributed to a trade deficit of JPY -777B for the month.

When adjusted for seasonal variations, exports dropped by -1.8% mom to JPY 8567B, and imports decreased by -2.7% mom to JPY 8976B. Consequently, trade deficit narrowed from JPY -501B to JPY -409B.

Full Japan trade statistics here.

RBNZ Governor Adrian Orr, in his address to a parliament select committee today, emphasized there is "still a long way to go" to curb inflation. He added, "it's core inflation that's going to be our challenge ahead".

Orr also noted the complexity of this challenge, pointing out that much of the core inflation factors are entrenched within central and local government influences, including rates and taxes. He cautioned that tackling these elements in the "last five yards on the inflation battle is going to be tough."

Adding to the economic challenges, Orr highlighted the current record-high levels of net inward migration in New Zealand. This surge in migration has surpassed RBNZ's expectations and presents additional complexities for monetary policy, housing demand, asset prices, and the general inflation outlook.

Regarding the country's economic growth, Orr mentioned that GDP was "surprisingly subdued," with a contraction of -0.3% in Q3. He indicated that RBNZ is internalizing this complex situation and will provide more detailed insights in their monetary policy statement due in February.

Chicago Fed President Austan Goolsbee, in an interview with Fox News overnight, said that investors might be "a little ahead of themselves" with their "euphoria" as stock markets surged to record highs following Fed's announcement last week.

Goolsbee did acknowledge that if inflation continues its downward trend towards target, Fed might reassess its restrictive stance. "If inflation continues to come down to target, then the Fed can reconsider how restrictive it wants to be," he stated.

However, Goolsbee was clear in emphasizing Fed's independence, asserting that the central bank will not be "bullied" by market pressures.

Richmond Fed President Thomas Barkin, in an interview with Yahoo Finance, acknowledged that the Fed is making "good progress" in its efforts to bring down inflation.

However, he pointed out that the economic data has been somewhat erratic, emphasizing his desire for "consistency" and "breadth" in the inflation metrics. He explained that he is looking for "consistency around our target and a broad-based disinflationary set of results."

On the topic of interest rate cuts, Barkin's stance was cautious and data-dependent. He suggested that a response from Fed would be appropriate if inflation trends downwards as hoped. However, he stressed the unpredictability of economic data

"If you're going to assume that inflation comes down nicely, then, of course, we'd respond appropriately. You know, I don't assume what the data is going to do. We'll see what happens," he said.

Atlanta Fed President Raphael Bostic emphasized a lack of urgency in cutting interest rates, projecting potential rate reductions only in the second half of 2024.

In an event overnight, Bostic expressed his view that inflation is likely to decrease gradually over the next six months. This outlook underpins his stance that there is no immediate need to deviate from the current restrictive monetary policy.

"For me, I'm thinking inflation is going to come down relatively slowly in the next six months, which means there's not going to be urgency for us to pull off our restrictive stance," he stated.

Bostic anticipates that Fed might implement two rate cuts in the latter half of 2024. However, he clarified, "It is not like there has been an active discussion on this."

Highlighting the prevailing economic uncertainties, Bostic advocated for a "cautious but resolute" approach. This strategy involves a resistance to reacting hastily to individual data points and instead focuses on making sure "the trends are really trends."

• Stellar year for US stock markets, fueled by ‘soft landing’ hopes
• Can the rally persist in 2024, despite high valuations and election uncertainty?
• European valuations are much cheaper, partly reflecting recession concerns

US stocks race higher, but tougher environment ahead

It’s been a sensational year for US equity markets. The S&P 500 has risen more than 23% while the tech-heavy Nasdaq 100 has gained a stunning 52% so far, with both indices coming within breathing distance of their record highs. Fears about a recession have melted away and investors are increasingly confident the US economy can achieve its elusive soft landing.

Bets that the Fed and other central banks will slash interest rates next year have also served as jet fuel for this rally, alongside the hype surrounding artificial intelligence and the prospect that it could usher in an era of rising productivity.

That said, there are some red flags as we head into next year. For starters, equity valuations are expensive. The S&P 500 is currently trading at over 19 times what analysts expect earnings to be over the coming year, which is a historically high valuation multiple.

Outside of the pandemic years, the last time the market traded at similar valuations was back in 2001, as the ‘dot com’ bubble was bursting. Such a high multiple would make more sense if interest rates were extremely low and investors had no real alternative to stocks, or if corporate earnings were growing at an impressive pace. Neither is the case today.

Indeed, earnings assumptions by analysts seem overly optimistic. For 2024, analysts expect S&P 500 companies to generate earnings growth of over 11%, which would be a tremendous acceleration from the 3% growth the market is on track to achieve this year. The question is whether such a profit boom is a realistic prospect, particularly as we are heading into a global economic slowdown.

Even though the US economy has been resilient, with an enormous government deficit shielding economic growth, it’s questionable whether this strength will persist. Business optimism is subdued and several retailers including Walmart have recently warned consumption is losing power, especially at lower income levels.

Looking outside the US, the situation is even worse. Europe is probably in a mild technical recession already, while China is dealing with the painful deleveraging of its housing sector. It’s difficult to square this gloomy picture with the cheerful earnings projections, considering that S&P 500 companies derive 40% of their revenue from overseas.

In other words, the soft landing narrative has been fully priced into equity markets, but it is not necessarily supported by the macroeconomic landscape. Even if the US ultimately dodges a recession, a weaker environment globally could still impact corporate earnings, preventing them from racing higher as anticipated.

Another element is the US presidential election next year. Historically speaking, equity markets tend to underperform in election years, ahead of the vote in November. This phenomenon reflects uncertainty around the outcome, which pushes investors to hedge some of their risk exposure. That said, the market often rallies once the election has passed, almost irrespective of who wins.

Therefore, the risk-to-reward profile for US equities does not seem very attractive heading into next year. Stocks are already priced for perfection, which leaves scope for turbulence in case reality does not match the market’s rosy expectations.

Now to be clear, all this does not imply some apocalyptic crash is imminent. It simply means that the upside appears limited with valuations already stretched, especially if earnings growth undershoots.

Sluggish growth baked in European equities

The Euro area and UK have been suffering from subdued economic growth this year, leading markets to price in a higher probability of a recession.

Europe's economic engine - Germany - is on the brink of a technical recession due to the malaise in global manufacturing and its reliance on slowing Chinese demand. Meanwhile in the UK, things are not looking great either as inflation remains elevated, fueling concerns about a period of stagflation next year.

Although there are storm clouds hanging over Europe, pessimistic forecasts are already priced into European stocks. Forward earnings estimates have come down to reflect recessionary risks, at a time when a soft landing and corporate earnings accelerating is the baseline scenario in the US. Therefore, European stocks seem better positioned to weather the impact of earnings downgrades, especially if central banks fail to cut rates at the right pace, inflicting unnecessary damage on the economy.

From a chart perspective, the FTSE 100 and DAX 40 are currently trading around 5% and 2% below their all-time highs, respectively. Combining the bleak earnings forecasts with the historically high prices, someone would expect stock valuations in Europe to be inflated. Surprisingly, the leading European indices are trading at a discount both historically and against the US markets.

Even if the discount can be attributed to a more value-oriented composition, the historically low valuations are clearly limiting the downside in case of a deeper-than-expected recession. Speaking about structural differences, interest rate cuts in a growing economy could bolster the tech-heavy US equity markets, but the defensive nature of European indices could attract more interest in a severe economic downturn.

Elections are another common risk factor for these economies in 2024. In June, markets will brace for the European Parliament elections, as the next European Commission needs to implement tighter fiscal reforms after a three-year period of ultra-loose policies.

Turning to the UK general election, the Labour Party has a massive lead against the incumbent Conservative Party in opinion polls. That’s a risk for British equities, considering that Labour governments are often associated with higher taxes, especially on corporations. 

In a nutshell, the future of stock markets in the Euro area lies heavily on China’s economic performance next year, while for the UK, risks mostly stem from the government’s fiscal stance.  But even if the worst-case scenario strikes, European shares are in a better position to absorb any shocks compared to their US counterparts, as much of the pessimism is already baked in.

• CHFJPY reversed from support level 162.45
• Likely to rise to resistance level 168.00

CHFJPY currency pair recently reversed up from the key support level 162.45 (which has been reversing the price from August).

The support level 162.45 was strengthened by the lower daily Bollinger Band, support trendline of the daily down channel from November and the 38.2% Fibonacci correction of the upward impulse from June.

Given the prevailing uptrend, CHFJPY can be expected to rise further to the next resistance level 168.00 (former support from November).

• USDCAD broke support level 1.3410
• Likely to fall to support level 1.3300

USDCAD currency pair under the bearish pressure after the pair broke the support level 1.3410 (low of wave B of the previous ABC correction (2) from the middle of July).

The breakout of the support level 1.3410 accelerated the active short-term impulse wave 3 of the higher impulse wave (3) from October.

USDCAD can be expected to fall further to the next support level 1.3300 (target price for the completion of the active impulse wave 3).