The Surprises Keep Coming
What is often one of the quieter weeks of the year turned out to be more volatile than anticipated after the US Federal Reserve released a surprisingly hawkish set of minutes from its December meeting. On reading the notes, it becomes clear that the Federal Reserve is prepared to move interest rates higher earlier than expected, leading market participants to price the chances of a move upwards before March at over 80%. The minutes also made it clear that the current regime of asset buying (quantitative easing) will be replaced by quantitative tightening sooner rather than later. The combined effect strengthened the dollar, which made back a large chunk of the losses it had suffered in the run-up to Christmas, although sterling and the euro didn’t suffer too much.
Last week also saw the release of the first meaningful data set in 2022 in the shape of the in-depth Non-Farm Payrolls employment report in the US. Although the number came in somewhat lower than the market had anticipated at “only” 199,000 jobs created, it again showed that the problem is not a lack of vacancies but candidates. The unemployment rate is now below 4%, and the scarcity of applicants could lead to further inflation and the start of a wage spiral, underpinning the markets reading of the Federal Reserve’s interest rate intentions. Although not as sharply, inflationary pressures are also being felt in the old continent and the UK. Apart from economic data, the continuing rise of Omicron cases will play in the background. Although, so far, despite it being more contagious, it appears to be milder and not as damaging to the economy as it could be. The week ahead looks to be dominated by US data, including its latest inflation report and worries over political tensions with Russia.
The only significant data release scheduled this week is Gross Domestic Product for the three months to the end of November. The period predates the outbreak of the Omicron variant and consequently may be discounted by the markets. The effects of the variant seem to be mild on both the individual and the economy, so a strong number may encourage more speculation that the Bank of England may tighten after its February 3rd meeting. This should continue to lend a helping hand to sterling, particularly against the euro. Any moves may be capped as there is increasing political risk attached to sterling with Prime Minister Johnson under pressure on several fronts. As always, with sterling Brexit will lurk in the shadows, but recently there has been scant mention of it apart from some sabre rattling by Liz Truss over the weekend. Alongside the GDP data, Industrial and Manufacturing Production are also due for release on Friday.
The euro has opened the year in a narrow range against the dollar and sterling, with a bias towards weakening. With Omicron cases still increasing, reaching in excess of 300,000 a day in France, the European Central Bank will continue to diverge in policy to the other major central banks. But with eurozone inflation picking up to 5% in December from the previous month’s 4.9%, the ECB is starting to come under more pressure, in particular from Germany, to review their narrative that the rise in inflation is transitory. In defence of their policy, the jump was primarily due to a spike in energy prices which climbed by 26%. Until they change their stance, the continued divergence of approach will make the euro attractive for traders to borrow and sell in what is known as a “carry “trade keeping a lid on any upside potential for the single currency. A relatively quiet week for data starts later this morning when Sentix publish their Investor Confidence survey and Eurostat release the November Unemployment Rate for the eurozone. Later in the week, on Wednesday, Industrial Production is released for the bloc, and on Friday, the Eurozone Trade Balance. Christine Lagarde is due to speak tomorrow morning, as is Frank Elderson on Thursday afternoon.
As we said earlier, the Non-Farm figures were more potent than the headline figure of 199,000 appeared. The dearth of job seekers, possibly leading to a wage spiral, that the data revealed will pile more pressure on the Federal Reserve to act sooner and stronger than they may have otherwise contemplated. The week ahead could see the headline Consumer Price Index break 7% annually for the first time since the 1980s, when it is released on Wednesday afternoon. In a busy week for data, the weekly jobless total is scheduled for Thursday, and on Friday, December’s Industrial Production and Retail Sales are released alongside the Sentiment reports from the University of Michigan. Jerome Powell and Lael Brainard are scheduled to give their confirmation testimonies on Tuesday and Thursday and have an opportunity to comment on inflation when they do.
For the first time in several years, the Swedish krona failed to rally during December and astonishingly failed to do so during the in-between days. Most market participants and commentators put it down to the fact that central banks around the world are at last mooting the possibility of a rate hike in the not too distant future, whereas the Riksbank remains quiet on that front. This week is the first official week after Christmas and starts with the Construction Output data. On Friday, the latest Inflation figure is released, and it is expected to come in at 4% The Norwegian krone received all the support it could get from Norges Bank Governor Olsen last year when it became the first G10 currency country to raise rates, but a wider rally failed to materialise. This year all eyes will once again be on the rhetoric and actions of Governor Olsen, and today’s Inflation data release may prove to be a good indicator of what is to come. It is forecast to come in at 5.1% on a year-on-year basis, much higher than the target of 2% set by Norges Bank.