Weekly Market Outlook – A quiet trading week and lower market activity ahead of the Christmas break. The US calendar will be the busiest in a relatively calm week as final GDP figures and PCE inflation are to be released. Other notable releases will be the RBA meeting minutes, Canadian and UK GDP.
Will the RBA Meeting Minutes Support the Aussie?
The minutes of the RBA’s December meeting will reveal whether the bank intends to end its bond purchases in February, paving the way for a rate hike in 2022. In this meeting, the Reserve Bank of Australia maintained interest rates at 0.10% and government bond purchases at a weekly rate of $4 billion until at least mid-February 2022.
The policy statement acknowledged the upbeat economic recovery from the setback caused by the Delta outbreak. However, the emergence of the Omicron strain restrains the outlook while it is not expected to derail the recovery. The economy is still expected to get back its pre-Delta path in the first half of 2022.
The bank also mentioned that the purchase program will be discussed at February’s meeting taking into account the actions of other central banks; the Australian bond market; and, most importantly, the actual and expected progress towards the goals of full employment and inflation.
US GDP and PCE in Focus
Key data release marks up the US agenda this week. Investors will turn their attention to Q3 final GDP readings, which is expected to confirm a 2.1% annualized growth in July-September quarter. PCE inflation for November will probably point to a 5.6% annual increase. The monthly index is expected to stabilize around 0.6%. Core PCE inflation to increase by 4.5% annually and 0.4% monthly.
Upcoming data will be watched closely to confirm whether the Fed will pursue its tightening approach next year.
Last week, the Federal Reserve sounded more hawkish by letting go of the “transitory” inflation view confirming that recent economic developments warrant further policy tightening steps. The bank doubled the rate of QE tapering to $30bn per month as widely expected. This rate is expected to continue monthly with a $30bn reduction in asset purchases every month starting from January.
The federal committee also raised its forecasts for 2022 rate hike to three times instead of only two. However, rate hikes are tentative given the uncertainty from the Omicron outbreak and its possible economic consequences.
The US Dollar gained major support from the hawkish tone and tightening approach by the Fed, trading at 1-year high.
GBP Turns to Growth Figures after BoE’s Rate Hike
The UK will be publishing updated figures on third-quarter GDP. Market consensus points to annual GDP growth of 6.6% in Q3 and quarterly growth of 1.3% between July and September.
The Bank of England decided in its December’s meeting to increase interest rates by 15 bp to 0.25%, for the first time since the pandemic hit the economy in 2020. Meanwhile, the Committee voted unanimously to maintain asset purchases at £875 billion. The bank justified its move by continuing upward pressure on CPI inflation against previous outlook for inflation to fade as supply disruption ease, global demand rebalanced from goods to services, and energy prices stop rising.
However, the committee noted that the Omicron variant poses downside risks to activity in early 2022. So, medium term inflationary pressures are still uncertain.
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