Now that the positive seasonality of Thanksgiving Week is over, the market focus will shift back to economic news and the coming Fed interest rate decision. There are several important economic reports coming up, but on Monday morning the focus is on Covid protests in China.
Futures are indicated lower as protests in China over the country's zero-Covid policy continue to spread. There are concerns that the protests will not only hurt economic activity and the supply chain but may generate an aggressive response from the government.
Last week the primary focus of the market was on the positive seasonality around the Thanksgiving holiday. It played out in textbook fashion, but the Monday following the holiday has a tendency to be negative, plus there will be greater focus on coming news events.
On Tuesday is the consumer confidence report. On Wednesday are the job openings data and oil inventory. On Thursday, Fed Chairman Jerome Powell will be giving a speech and the Personal Consumption Expenditures (PCE) inflation report, which the Fed favors, will be released. On Friday is the jobs report for the month of November.
The important issue is how all this news impacts the Fed interest rate decision that takes place on Dec. 14.
There is a lot of data to digest, but as of Monday morning the market is anticipating a 70% chance of a one-half percentage point rate hike and a 30% chance of a three-quarters point hike. The market is very likely to see a strong move based on changes in these odds, but even if they don't change the longer-term picture is still murky.
What has been most interesting about recent market action is the strong inclination to ignore negative economic news. The Fed has been insistent that it is not even close to victory over inflation, but the market wants to celebrate a dovish pivot despite the lack of evidence. All year long, the market has only become less optimistic when it has been forced to by either Fed comments or economic news.
Powell speaks on Thursday and it is likely that he will remind the market once again that rates are going to continue to go higher over time. The Fed is determined not to make the mistake of a premature pivot once again and is more likely to err on the side of creating a recession than backing off on inflation.
The Covid crisis is the focus of the market this morning, but there is a flood of economic news coming that is going to determine where things are heading.
The S&P 500 is hitting overhead resistance as this news flow develops, so the risk to the downside is more pronounced.