The U.S. is set to release its initial estimate of Q4 GDP on Thursday, with analysts projecting a 2.6% annualized growth rate following 3.2% in Q3. Despite this apparent strength, recent economic indicators suggest the economy is losing momentum at the end of 2022, with retail sales falling, industrial production decreasing, and residential construction experiencing six consecutive monthly declines.

GDP is expected to weaken in the upcoming quarters due to the Federal Reserve’s ongoing interest rate hikes. The dollar has also dropped to a nine-month low as market expectations shift towards the Fed implementing smaller rate hikes at its next meeting in January/February.

Additionally, the U.S. government has reached its $31.4 trillion borrowing limit, leading to a dispute between President Biden’s Democrats and Republicans over raising the debt ceiling. This could result in a prolonged stalemate and potentially a last-minute resolution before June, when the Treasury may run out of options to avoid default.

A slew of earnings results from major companies in the coming week, such as Microsoft and Tesla, will also be closely watched as the economy shows signs of slowing down. Concerns of a possible recession amid high interest rate environment have hit growth sectors, pushing major tech companies to lay off thousands of employees.

Reporting season will be in full swing in the next two weeks, with Microsoft reporting on Tuesday, Tesla Inc and IBM on Wednesday, and Intel on Thursday, with analysts expecting Q4 2022 YOY earnings to decline.

Although recent data showed that inflation has cooled, it has also highlighted the labour market remains tight offering the central bank room to stick with its aggressive policy tightening. According to the CME FedWatch tool the Fed is likely to hike interest rates with 25 basis point at its next two-day policy meeting starting on the 31st of January, bringing the Fed funds rate to a range of 4.50% – 4.75%.

Before that meeting, the Fed have additional key economic data for review such as Q4 2022 GDP data which will be released on Thursday and the Fed’s preferred inflation indicator – the Personal Consumption Expenditures report due on Friday.

While America is not in an official recession yet, there is widespread deterioration in economic conditions in recent months, such as labour markets, manufacturing, housing construction triggered by the barrage of interest rate hikes by the Fed in its effort to bring down inflation. The market is expecting overall economic activity to deteriorate further in the coming quarters before picking up in the final quarter of 2023.