The week kicked off with a hattrick of stronger-than-forecast US data, including Friday’s non-farm payroll, the ISM services PMI and factory orders. The data raised questions over the Federal Reserve’s ability to slow the pace of rate hikes, hitting risk sentiment.
Recession fears grew further after top executives from the big investment banks on Wall Street raised concerns over the economic outlook in the US. One by one, the US bank executives warned that the economy is approaching a slowdown. Citigroup's chief executive officer Jane Fraser warned that the US is likely to enter a recession next year, and JP Morgan Chase & Co, the biggest lender in the US, said that it expects the unemployment rate to rise in 2023 and peak at 5% in 2024.
In addition, US recession worries investors were also digesting an announcement by China that it will ease some COVID restrictions and end its zero-Covid strategy. The market’s reaction to the announcement by the world’s second-largest economy has been muted. This is unlikely to be a quick process, and there are doubts as to what will happen if infection rates and hospitalizations rise dramatically. The news also came after Chinese trade data showed that both imports and exports dropped sharply in November.
Indices
After two straight weeks of gains, US indices are set to book losses across the week. The S&P500 is pointing to losses of over 3% as recession fears hurt risk sentiment. The price briefly rose above 4000 but failed to hold above the key psychological level and has also fallen back below the key 200 DMA.
In Europe, stocks have faired better. The DAX is set for a 1.8% decline across the week after failing to rise above resistance at 14500.
The FTSE has fared better still, pointing to losses across the week so far of just 0.9%, following three weeks of gains. The UK index, which is heavyweight mining firms, has found support from China’s reopening.
FX
The USD has seen choppy trading this week and is pointing to gains of 0.7% after two straight weeks of losses. The greenback is benefitting from safe-haven flows as recession fears build.
This week saw the RBA raise interest rates by 50 basis points and the BoC hike rates by 50 bps, the upper end of expectations to 4.25%. The BoC also indicated that rate hikes could be paused or end here. The loonie is one of the worst-performing majors this week, in part owing to the potential pause in rate hikes but mainly as CAD tracks oil prices lower.
Oil
Oil prices have slumped just shy of 10% so far this week, in its worst weekly performance since March. The selloff has happened despite OPEC+ keeping production unchanged and despite the Russian oil price cap taking effect. The G7 agreed to cap Russian seaborne oil at $60 per barrel in a move that could effectively tighten supply. So far, the price hasn’t reacted to the restrictions – possibly because China and India are buying up Russian oil and they are not participating in the price cap. Instead, recession fears have dragged oil prices sharply lower.
Fears of an economic slowdown in the US, the world’s largest oil consumer, are hurting the demand outlook and offsetting optimism surrounding the re-opening in China.
Bitcoin
Bitcoin has traded in a range-bound manner so far this week as its consolidation pattern continues. Bitcoin volumes have fallen significantly in the wake of the FTX collapse as investors withdraw their funds. The cryptocurrency has been muted as investors look ahead to the next catalyst: the central bank meeting next week.
What to watch next week: Central Bank Bonanza
Next week is set to be a busy week with the three main central banks meeting and inflation data. These meetings could set the tone for the rest of the year and early 2023.
Federal Reserve rate decision – Wednesday, 14th December
The markets are expecting the US Federal Reserve to raise interest rates by 50 basis points on Wednesday this would be a step down from the larger 75 basis point increase across the past four meetings. This is consistent with recent comments from Federal Reserve officials, including Fed chair Jerome Powell who signaled in a speech that the Fed will likely slow the pace of rate hikes from the December meeting. Markets are still pricing in a small probability that the Fed could hike rates by 0.75% however, this would be a surprise given that peak inflation appears to have passed. The real question for the market is what the Fed might do in February with rates. Currently, the market is pricing in an equal probability of A0 or a 25 basis point hike however, details from the December announcement could provide more clarity here.
ECB rate decision – Thursday, 15th December
Inflation in the Eurozone is showing signs of cooling. CPI in November cooled by more than expected to 10% YoY from 10.6%, and PPI also dropped significantly to 30.8%, down from 41.9%. The ECB is widely expected to raise interest rates by 50 basis points after two straight hikes of 75 bps. The ECB is also likely to signal that interest rates will need to be lifted several more times in order to tame inflation. The ECB has so far raised interest rates by 200 basis points in this cycle, taking rates out of negative territory to the current level of 1.5%. Further moves are also expected early in 2023, which could take the terminal rate to around 3%. Even then, the journey from 10% inflation to the 2% target will likely be a very slow journey. Eurozone inflation data is due to be released ahead of the meeting.
BoE rate decision – Thursday, 15th December
The BoE Monetary Policy Committee is set to meet next week and make its interest rate announcement. The meeting comes as inflation in the UK is at a 40-year high of 11.1% and as the UK economy teeters on the brink of contraction. The central bank has raised interest rates eight times in a row so far in its fight against inflation. In the latest meeting in November, the BoE raised interest rates by 75 basis points taking the benchmark rate to 3%. Expectations are for the UK central bank to raise interest rates by a further 50 basis points, taking the benchmark rate to 3.5%. At the last meeting, BoE Andrew Bailey said that the market was overpricing the terminal rate. The money market is pricing in a hike to 4% in early 2023 and potentially up to 5% next year. A hawkish-sounding BoE could boost the pound. UK inflation data is also due next week.
*Trading is risky.