stocks on friday looked ready to retreat a smidgeon as wall street closes out the week that’s ok the sp 500 spx is already up 575 in 2023 helped by the belief that slowing economy and softening inflation will allow the federal reserve to be less aggressive in raising borrowing costs this has meant that somewhat poor economic data is generally well received by equity investors catastrophically bad economic news may be a different matter that correlation may be put to the test again next week when the fed is expected to deliver a 25 basis point rate hike followed by a press conference with chairman jay powell but stock bulls who hope to find signals the central bank will soon stop tightening policy may wish to think again that’s the warning from citi’s quantitative global macro strategist alex saunders who says investors must brace for a shift in market responses “us equity market reaction to economic surprises right now is that bad news is good for markets this is one of the best regimes for us equities this correlation between news flow and equity markets is typical during hiking cycles” he says saunders studied citi’s economic surprise index and its relationship to stock market action and overlaid that with the monetary policy cycle the chart below shows the mean returns in four regimes the best regime says saunders is with positive economic surprises and a positive equitysurprise correlation which happens 34 of the time the worst outcome is when the market gets good economic news and equitybond correlations are negative which happens 18 of the time however “the current reading on citi’s economic surprises index is 15 and the correlation between surprises and returns is negative – markets have tended to react positively to a weaker surprise index” the likely reason is equities seek relief from the end of hiking cycles but this relation tends to flip once the fed goes on hold “as the hiking cycle matures the correlation between economic surprises and us equity market performance could turn positive in this case weak economic data from a likely 2h us recession would weigh on markets” such a transition to a regime where bad news is bad news “could be the sign that the bear market rally is fading – for example the selloff after weak retail sales numbers earlier this month” in fact saunders can see the market painting itself into a corner “additionally a string of positive economic releases would also give us pause in equities as the fed could see this as a green light to tighten financial conditions further” he says “the narrow path for equities is either to continue trading bad news in hope of a fed pivot or for recession fears to completely recede inflation to continue falling and good economic news to become good market news again” he concludes for more on how telling economic surprises can be see the chart below stock futures es00 ym00 are tilting south led by nasdaq100 futures nq00 after poorlyreceived results from intel the 10year treasury yield tmubmusd10y is up 5 basis points to 3547 while the dollar dxy is flat gold gc00 is softer and crude cl1 is perkier up 12 to 8198 a barrel for more market updates plus actionable trade ideas for stocks options and crypto subscribe to marketdiem by investor’s business daily intel intc shares are down nearly 10 in premarket action after the chip maker late thursday reported– a big fourthquarter miss and a gloomy forecast watch out at 830 am eastern for the pce price index report it’s the fed’s preferred inflation measure and is likely to have an impact on the central bank’s thinking as it prepares to deliver its monetary policy decision next wednesday also to come on friday real disposable incomes and real consumer spending for december will be released at 830 am followed at 10 am by the university of michigan consumer sentiment index alongside 1year and 5year inflation expectations all for january december pending home sales are due at 10 am all times eastern the selloff in shares of companies linked to gautam adani asia’s richest man continued on friday after hedge fund titan bill ackman lent his support to hindenburg research the short seller who this week published a critical report into the adani empire’s activities shares in hasbro has are down nearly 4 after the toy maker said it plans to lay off about 15 of its workforce and warned wall street of a loss and revenue drop after a disappointing holiday season best of the web how russia’s war on ukraine changed the global oil trade german stocks have been doing well of late the dax 40 was up 146 over the past three months at thursday’s close while the sp 500 has gained 66 the chart below from deutsche bank partly explains the difference sliding energy costs in europe over the winter and more recently the opening up of china’s economy have made german business leaders more optimistic feeding into economic data it is surprises that most move markets and the eurozone data has been more positively surprising than those in the us “the big question for 2023 is whether the momentum in europe and china and the recent loosening of global financial conditions can help offset some very worrying recent us data it’s possible that the global economy is normalising from the shock of the ukraine war and china’s zero covid policy and that this will help the us in the near term” said deutsche strategist jim reid here were the most active stockmarket tickers on marketwatch as of 6 am eastern need to know starts early and is updated until the opening bell but sign up here to get it delivered once to your email box the emailed version will be sent out at about 730 am eastern listen to the best new ideas in money podcast with marketwatch reporter charles passy and economist stephanie kelton