A tougher week for global markets as the rally in equities stalled ahead of the key rate decisions this week from the Federal Reserve, the ECB, the Bank of England, and the Swiss National bank.
Review of last week’s key action
FTSE -80 -1.05% DOW -953 -2.77% S&P -137 -3.37% NASDQ -456 -3.99% DAX -158 -1.09% NIKKEI -123 -0.44% Hang Seng +1,225 +6.56%
Equity markets fell throughout last week as the US economy experienced better than expected service sector data last Monday that set the tone for the rest of the week. To cap it all, last Friday both the core and headline Producer Price readings were higher than expected which further undermined US equites which closed out on the lows for the week.
The risk-on move felt top-heavy coming into last week, following on from the previous week’s better than expected Non-farm employment data. Last week’s data just makes this week’s interest decision more interesting.
Many economists believe that inflation in the developed world will peak in December / January which is earlier than forecast just 3 months ago. Energy prices – not just crude oil but also natural gas prices – have fallen further than many expected. The cold weather now engulfing most of Northern Europe will likely lead to a pick-up in gas prices but for how long.
Analysts and the markets seem convinced about the scale of rate increases expected from the major central banks this week. That is not the major concern, although any greater rate increases would not be welcomed by the markets. The greater risk is what central bankers say about expected future rate rises.
It has been a very tough year for investors with both equity and especially bond markets slumping which has destroyed the 60/40 equity / bond split favoured by many investors. The ravages of inflation and the ending of QE sent bond prices into a tailspin which have hurt many portfolios which like to rely on Bond returns when equities are out of favour.
Despite being late out of the blocks, all central banks have underlined their inflation fighting credentials, none more so than the Federal Reserve. But it was in fact the Bank of England that was ahead of both the Fed and the ECB.
Markets last week suffered a bout of angst following some decent gains over the past two months. The optimism shown by the markets may not be reciprocated in the guidance given by those responsible for bringing inflation under control.
The key rate decisions happen this Wednesday and Thursday, by which time we will have seen the US CPI data where inflation is expected to slip again to 7.3%, having hit as high as 9.1% in July.
EURUSD unchanged GBPUSD -0.23 -0.18% USDJPY +2.27 +1.7%
Forex markets showed less concern about what central bankers might do and say this week. Whilst equity markets fell ahead of the expected rate rises this week, the US Dollar was little moved from the previous week, albeit it did not lose further ground either.
In eleven weeks, the Euro has gained 10-euro cents versus the US Dollar or 9.8% so perhaps the rally is quite stretched just now and like equities will be susceptible to a snap back if bankers deliver more hawkish guidance.
Sterling’s rebound against both the US Dollar and the Euro has been even more substantial although the self-inflicted wounds delivered by the awful Truss government is the main reason for the outperformance.
The MPC will deliver another rate rise this week but with inflation likely to top out earlier than many expected just three months ago, Sterling and the UK economy could be the bigger beneficiary of this news.
Gold unchanged UK OIL -9.22 -10.75% US OIL -8.73 -10.75% Bitcoin unchanged
Gold is really a US Dollar proxy so not surprising to see it close unchanged last week as the US Dollar was also mostly unmoved.
Oil markets continued to surprise investors with substantial falls last week, dragging the oil price down to the lows for the year. This is more remarkable considering the continuing war in Ukraine and the Opec 2 MB/D cut in production just three weeks ago.
The G7 price cap on Russian crude is having an effect but not on the price as some feared. The FT reported last week that as soon as the cap came into force there was evidence of disruptions to the supply chain with many Russia bound tankers queuing in the Bosphorus Straits as Turkey blocked any tankers that were uninsured. The evidence suggests that the oil will keep flowing but the Cap will prevent prices running higher.
Bitcoin seems becalmed as crypto enthusiasts are wondering where the next collapse will come from. It has been a torrid year for anyone holding Crypto with Bitcoin down 63% year to date.
Data / events for the week ahead
An exceptionally busy week for data and events and a key week for global markets with interest decisions from the Federal Reserve, the ECB, the Bank of England, and the Swiss National Bank who are all expected to raise rates.
But before the Federal Reserve lets the markets know, we have the US inflation data out on Tuesday which might test nerves ahead of the announcement on rates on Wednesday evening.
Monday:
UK - Monthly GDP data. A rise of 0.4% following the previous month’s worse than expected decline. A backward-looking indicator that gives little clue to future economic performance.
Tuesday:
UK - UK Unemployment data. Little change expected in the claimant count although unemployment rate expected to edge up slightly.
Germany - ZEW economic sentiment indicator. A survey of German institutional investors and analysts. Sentiment expected to improve again but still very low historically. Euro sensitive to any change in the prospects of the EU largest national economy.
US - CPI – Inflation data. Expect fall in the annual rate to 7.3% from 7.7% as energy price falls relieve pressure. A fall to 7.3% for annual inflation will confirm a trend that started in august but had a blip in September when prices jumped up. USD, Equities and Bonds all sensitive.
Wednesday:
UK - CPI, Inflation data for November. Following the previous month’s jump to 11.1% from 10.1% we are now expected inflation in the UK to slip back to 10.9% as analysts expect inflation to top out this month or next month. GBP and UK equities sensitive.
US - FOMC rate decision. A hike of 0.5% is expected – taking rates to 4.25% – 4.5% band. This will be the first 0.5% hike following four 0.75% hikes. Whilst the scale of the rate rise is key, it’s what the committee say about future rate rises or the Dot Plot where committee members give their forecasts for future rates rises. Whilst the market hopes for a soft landing, it is now more likely that the US will experience a mild recession next year as the effects of higher rates slow activity. USD, global equities, Bonds, commodities all sensitive to this announcement.
Thursday
Switzerland - Swiss national Bank policy meeting. An increase of 0.5% is the consensus as the SNB plays catchup with other CBs.
UK - Bank of England’s monetary policy committee – The MPC – meet to decide on monetary policy. Market has priced in a 0.5% hike in interest rates to 3.5%. Committee members will acknowledge the modest easing in inflationary pressures to slow the pace from the previous 0.75% hikes. Expect a unanimous verdict. As with other Central Banks, the guidance on future rate rises will be key. Andrew Bailey, the BoE Governor, let the markets know a few weeks ago that the market was pricing higher rate rises than was unwarranted as the economy slides into a recession. Most economists expect interest rates to top out somewhere around 4.5% to m4.7% in late Q1 / Q2 next year. During the Truss administration, markets were pricing rates rises to 6%.
Eurozone - ECB policy meeting. Expect an increase in the main Refi rate to 2.5% from 2%. A hike of 0.75% is a possibility but less likely as energy costs slide. As with other major western economies, inflationary pressures have eased over the past 8 weeks as energy costs continue to fall. However, significant risks remain and like other central banks, the ECB will want to reinforce its inflation beating credentials. Analysts expect Eurozone inflation to fall back to the bank’s targeted level of 2% by 2025. Press conference could be lively. Euro, western equity, and bond markets all highly sensitive.
US - Core retails sales. +0.2% following the surprise jump last month.
US - Phill Fed Manufacturing Index. Consensus numbers vary a lot over the past few months. Expect an improvement from the weaker number last month.
Friday
UK - Retail sales. A weaker number compared to the previous month as consumers struggle with the general costs of living. Expect +0.3% after +0.6% the previous month.
EU, UK &US To cap a very busy week for data we have the flash manufacturing and services data for all the major western economies. The general picture is one of a holding pattern with services weakening slightly.
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