Global markets moved into risk-on mode last week following a slow start to the first week of the year.
US inflation fell again, following on from several months of declines from the peak of 9.1% in July last year. The US Dollar also declined as the CPI data underscores the belief from investors that the Federal Reserve won’t have to raise rates so aggressively in its fight against inflation. Core inflation, however, will be more stubborn so the Federal Reserve will likely sticks to its plans to ensure the inflation genie is put back in the bottle.
Review of last week’s key action
FTSE +144 +1.88% DOW +670 +2% S&P +104 +2.67% NASDQ +509 +4.82% DAX +476 +3.26% NIKKEI +145 +0.56% Hang Seng +747 +3.56%
US equities posted their best week for 2 months as optimism builds about US inflation and the size of future rate rises from the Federal Reserve.
US inflation fell from 7.1% in November to 6.5% in December as gasoline and other oil products fell in the wake of a sharp fall in crude oil prices. The NASDAQ jumped just shy of 5% as many components of the tech index are particularly sensitive to rate rises. The broad based S&P500 gained 2.67% marking two straight weekly gains this year and the best weekly performance since mid-November.
The Fed Watch tool from the CME implies two modest rate rises of 0.25% to 4.75% by March meeting but after that rates should remain on hold, although sentiment and these forecasts will inevitably gyrate as more data on inflation and inflationary pressures are released. Markets will have to wait until Friday 27th for the Federal Reserve’s preferred measure of inflation, the PCE or personal consumption expenditure.
European and UK markets also responded positively to the US inflation data and continued fall in natural Gas prices, which have now fallen some 80% since their peak at the end of August last year.
The UK markets had another strong week with the FTSE100 jumping another 144 points to close within a whisker of its all-time high of 7903 on 22nd May 2018. Positive trading statements from the big retailers helped bolster the bullish the mood following a quiet Christmas period. The more UK focussed FTSE250 also posted strong gains, jumping 448 points last week or 2.3%. The index has nearly recovered all of the losses sustained during the ghastly Truss administration.
It is worth noting the resilience in the Nikkei following a sharp appreciation in the Japanese Yen which would normally hurt the big exporters that dominate the Nikkei. Long Term bond yields jumped last week as traders speculate that the Bank of Japan will be forced to adjust again its ultra loose monetary policy. Last month the BoJ revised its yield curve control measures which have attempted to stabilise 10-year JGB yields. Unfortunately for the BoJ, this has had the reverse effect as traders speculate adding to much higher volatility in the usually quiet JGB market. Last Friday the yield on the 10-year JGB jumped to 0.53% on the opening, higher than the ceiling of 0.5% set by the BoJ. The BoJ policy meeting will be keenly anticipated this week – something that has not be the case for years.
EURUSD +1.93 +1.81% GBPUSD +1.41 +1.17% USDJPY -4.28 -3.24%
The US Dollar fell in reaction to the fall in US inflation to 6.5% which is the sixth month in a row of falling prices. The US Dollar Index has now fallen back to levels last seen in early June last year.
Since its peak on September 29th, the Dollar Index has fallen just shy of 10.5%. The market seems convinced that the Federal Reserve will likely only raise rates by 0.5% this year, in two 0.25% hikes, with a possibility of a cut in rates by the year end.
Sterling did not gain as much on the Dollar as the Euro, which tends to outperform when the US Dollar is falling. The political back drop here in the UK, with strikes blighting many sectors, has not been conducive to a further gains although UK equities still remain the top pick for many international investors.
Gold +53 +2.84% UK OIL +6.88 +8.7% US OIL +6.27 +8.5% Bitcoin +2,551 +15.1%
Gold reacts to the weaker US Dollar in typical fashion. And there is more evidence that Gold is attracting investors that have been distracted by Crypto over the past three years.
Oil markets were part of the risk-on moves as oil traders continue to price in a recovery in the Chinese economy following the ending of Beijing’s zero covid policy. Oil gained the most in a week since the second week in October.
However the effect of the unlocking of China remains unclear for now as the infection and mortality rates leap alarmingly across many regions in China. The Chinese recovery may take longer than some optimistic traders had hoped.
Data / events for the week ahead
A slightly busier week of data and events this week. Here in the UK we have employment and inflation data. Just one major central Bank policy meeting with the bank of Japan meeting this week. Normally it’s just routine but times have changed for the BoJ as speculators have forced the central bank’s hand.
This time of year we also have the World Economic Forum in Davos. Attended by the world’s top bankers, economists, central bankers and heads of state. Press are excluded from the events but there are plenty of discussions outside the events to keep the press busy.
This year the event is notable for the absence of a number of key heads of state, such as joe Biden, Rishi Sunak and Narendra Modi. Vladimir Putin and Russia are barred from the event.
Monday:
Davos - Day 1 of the WEF. The event culminates on Friday with daily events throughout the week.
US - Federal Holiday in observance of Martin Luther King’s birthday. All US markets closed.
UK - BoE Governor Andrew Bailey due to testify on the December Financial Stability Report before the Treasury Select Committee. GBP and UK assets sensitive.
Tuesday:
China - 4th Quarter GDP data – first reading of this final quarter of last year. The previous Q3 data showed a rebound from Q2 but Q4 is expected to show a slide to just 1.6% as the zero-covid policy restricted growth across much of China.
Germany - ZEW economic sentiment. A further recovery in the index which measures the outlook of German institutional investors and analysts. The index has been negative since Q1 last year. The fall in gas prices and with no further flare up in the Ukraine war has helped sentiment continue to improve in the Eurozone’s largest economy.
US - Empire State manufacturing index. An improvement in New York state which has a lot of manufacturing businesses. The index remains volatile with no clear trend just yet. The impact of the Fed’s aggressive rate hikes will continue to be felt.
Wednesday:
Japan - Bank of Japan monetary policy meeting. Another shift in the yield curve control measures (YCC)? Yen expected to be very volatile leading up to and after the announcement.
UK - CPI – Inflation reading. Much anticipated – economists are expecting a slight fall to 10.5% from 10.7% as food price rises are offsetting falls in energy costs. Looking at other major economies such as the US and the Eurozone and the falls in inflation sustained there, it’s possible we could see a greater fall than the consensus. GBP and Equities and Bonds all very sensitive.
US - Headline and core PPI. Leading indicator to future inflation. Core PPI expected to fall again, as seen in the inflation data.
US - Retail sales. Not the recovery that some had hoped for. A fall of 0.8% expected following a fall of 0.6% last month. That’s the effect of these rapid rate increases by the Federal Reserve.
Thursday:
Eurozone - Christine Lagarde speaking at panel discussion titled "Finding Europe's New Growth" at the World Economic Forum. EUR and EU equities sensitive.
US - Philly Fed manufacturing Index. Another important manufacturing region in the US. Like the Empire State Manufacturing Index, the Philly Index show modest signs of improvement although still below zero.
US - FOMC member Lael Brainard speaking about the economic outlook at the University of Chicago Booth School of Business. Interesting, especially with audience questions. USD, equities might react.
Friday:
UK - Retail sales. Retailers did better than expected over the festive period so not surprising to see retail sales pick up from November’s fall.
Davos - WEF. Christine Lagarde participating in panel discussion titled "Global Economic Outlook: Is this the End of an Era? Probably one of the more relevant discussions this week taking place at the WEF in Davos. Could be interesting to gauge Lagarde’s outlook for the year which could signal where the ECB go with interest rates.
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