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Inflation Remains a Concern for US Stock Markets

US stocks traded slightly higher on friday, though investors remained skeptical of the benign November PCE inflation report.

Dollar Bills Getting Vacuumed
Dollar Bills Getting Vacuumed

Despite a revision higher to the October data, traders found it difficult to view the report as a sign that inflation is under control. The final week of key economic releases for the year also contained negative news, suggesting that slower growth may be ahead in the coming year.

Corporations, including Nike, FedEx, and Micron Technology, have begun preparing for a potential downturn by cutting inventories and raising cost-saving plans. However, consumer spending has remained surprisingly resilient due to pandemic savings and pent-up demand. The Federal Reserve has indicated that it will tighten financial conditions until a recession occurs or something "breaks," making it a risky time to hold speculative assets.

Central Banks May Continue Tightening Despite Slowdown Fears

Bond yields are struggling to adjust to the actions of the European Central Bank and Federal Reserve, who have indicated that they are not finished tightening policy. Many believe that there will be no room for Fed rate cuts in the year ahead and that central banks will maintain high rates until underlying inflation is effectively addressed.

This process is expect to take time, leading some to predict that central banks will surprise with further rate hikes even into the second half of 2023. The Bank of Japan has also recently widened the tolerable band for Japan's 10-year yields, though it is unclear what impact this will have on currency markets.

Oil Prices Rise on Russia's Potential Production Cuts

Oil prices reached a three-week high and settled at a second straight weekly gain after Russia announced that it may cut production by up to 700,000 barrels per day in response to export sanctions. Physical traders are now in a precarious position, as they must hedge against the potential for rising prices while US inventories remain low.

The Biden administration's efforts to refill the Strategic Petroleum Reserve and China's efforts to reduce Covid-19 cases have also supported oil prices. However, the Polar Vortex in North America has reduced oil and gas output in the region, potentially leading to higher for price gasoline and heating oil.

Impacts of Polar Vortex on Energy and Agriculture Markets

The Polar Vortex that has swept through much of North America has had a significant impact on energy and agriculture markets. Reduced oil and gas output in North Dakota, Montana, and Canada has led to higher for price gasoline and heating oil.

The cold temperatures have also disrupted transportation, making it difficult for grain to be delivered to elevators and for livestock to be transported. It is has resulted in a temporary increase in grain and livestock prices. The extreme cold has also damaged crops, including citrus fruits and vegetables, leading to concerns about future supply and potentially higher prices.

Trade and Political Factors Affecting Markets

Political and trade-related issues continue to affect markets. Tensions between the US and China have risen as the US investigates allegations of intellectual property theft by Chinese companies and imposes sanctions on some Chinese officials. It is has led to concerns about the potential impact on the trade deal between the two countries.

The UK's exit from the European Union has also created uncertainty, as the deadline for the transition period is fast approaching, and the two sides have not yet reached an agreement on a number of issues. In addition, the impeachment proceedings against former US President Trump and the upcoming Georgia runoff elections have added to the political turmoil.