“A wise man can learn more from a foolish question than a fool from a wise answer” Bruce Lee

Despite a week of mixed news on the economic front, stocks finished the week in the blue, if only just. As did retail sales, US industrial and manufacturing production came in below expectations. The indication that inflationary pressures continue to ease may give hope that bad economic news may again be good news for stocks. For those who believe the inverted yield curve indicates an impending economic recession, this blot on the landscape continues to signal red. Earnings season is only in its infancy, and so far, the blended decline year over year is 4.6%, according to Factset, as margins appear to remain under pressure.

This week’s earnings will dominate as, amongst others Union Pacific, 3M, Microsoft, Boeing, IBM, Tesla and American Express all report numbers. This list provides just a small snapshot of the range of leading industries reflecting on the past quarter and their outlook for the year ahead. For those who like to look at the glass half full, the Vix fear index has fallen significantly in the past 3 months, and during that time, the S&P has only staged a modest recovery. The S&P 500 has broken back through its 50-day moving average, which could break through the 200-day average. When short-term trends lead longer-term ones it’s known as a golden cross and is interpreted by analysts and traders as signalling a definitive upward turn in a market. 

It is another busy week for economic data around the globe with the result of flash Purchasing Manager Surveys for January. The JP Morgan composite PMI combining services and manufacturing picked up slightly in December, but at 48.2 continues to indicate a contracting global economy. Any further pick-up may reinforce the slightly more optimistic tone set this week in Davos. For the UK, inflation will be back in the frame as we get the latest Producer Prices for December. As was the case for the data we received last week for the US, Producer prices are forecast to fall in December, if only modestly. On Friday, the Personal Consumption Expenditure Price index for December is forecast to fall again to 5.1% year on year.

We may get an indication this week if the economic data is mixed and inflationary pressures continue to weaken as to whether the market will start to buy into the bad economic news is good news for stocks as the combination will encourage the Fed at their meeting the following week to take a more dovish stance. As we mentioned before, the market is now starting to speculate the Fed may only move only 25 basis points, not the 50 that was forecast.

Stocks in Europe are set to start the day on a positive note.