01. Pause on Interest Rate Hikes?

The Federal Reserve is scheduled to meet next week to decide on the latest interest rates. Current forecasts suggest that there is a 98% probability that the Fed will raise rates by 25 basis points in early February, which means that this rate hike is almost certain.

However, the market also predicts that the Fed is very likely to pause interest rate hikes soon. Although Fed officials have entered a quiet period, a former US Treasury Secretary has suggested that at this meeting, the Fed does not need to commit to continuing rate hikes in the future.

The Fed's terminal interest rate is very likely to be between 4.75% and 5%. This also means that, based on the current interest rate level, the Fed would allow at most two more hikes of 25 basis points each.

Especially with the latest release of the PCE price index falling as expected, showing that inflation is under control. Looking at the year-over-year data, it was 5.5% in November, and the latest December data released has dropped to a growth rate of 5%.

From the chart above, we can also see that the PCE price index has fallen back to the level at the end of 2021.

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Similarly, after excluding food and energy, the core PCE price index's year-over-year increase has also fallen back to 4.4%, which is the lowest data since November 2021.

Although there is still a considerable distance from the Fed's long-declared inflation target of 2%, it now appears that the Fed's previous efforts have yielded some results. Due to the lag in market reactions to interest rate hikes, it is time to pause and wait for more specific reactions from the market. If the Fed continues to hike rates numbly, it is very likely to overcorrect.

02. Recession Probability 65%

On the other hand, other economic data from the United States show that economic growth has slowed significantly and may even enter a recession.The latest monthly statistical data indicates that currently, over two-thirds of economists believe that the United States will enter a recession in 2023, with the specific timing likely to occur between the second and third quarters, with a probability of 65%.

Although the United States announced this week that the fourth-quarter GDP growth rate on a quarter-over-quarter basis reached 2.9%, the year-over-year growth rate has dropped to 1.2%, which is the lowest year-over-year growth rate among the four quarters last year.

Some economists speculate that in the first quarter of this year, the year-over-year growth rate of the U.S. GDP will turn negative, with the economy contracting by 1.5%.

In fact, these trends have been reflected in consumer data for some time. Seventy percent of U.S. economic activity is determined by consumption, but in December last year, personal consumer spending decreased by 0.2% on a quarter-over-quarter basis.

The rise in prices due to inflation, as well as the increase in mortgage expenses due to rising interest rates, have severely compressed the consumption capacity of the average American consumer.

However, in the early hours of today, the three major U.S. stock indices still rose in tandem.

But in the process of the U.S. stock market, large funds are increasingly feeling the risk. In the past four weeks, at least $135 billion in funds have flowed out of the stock market and into money market funds.

The flight of funds indicates that the risks in the stock market are also accumulating.

Although the Dow Jones Industrial Average rose by less than 0.1%, it was the sixth consecutive day of gains. The S&P 500 Index rose by 0.25%, continuing to hold above 4,000 points. The Nasdaq Index had the highest increase, approaching 1%.Looking at the performance for the entire week, the Dow Jones Industrial Average (DJIA) had the best performance, rising by 4.3% this week, marking four consecutive weeks of gains.

Among technology stocks, Tesla once again rose by 11%, with its stock price previously hitting a low near $100, and has now surged to $178, representing a rebound of 75%.

Meta Platforms and Amazon both rose by more than 3%, while Google and Apple's gains were close to 1.5%.