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Federal Reserve Hikes Another 75bp and Pledges More as Inflation Persists 

Weekly Market Outlook: NFP, Fed minutes, and Euro Inflation to start the New Year

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Weekly Market Outlook – After the holiday lull, markets will slowly begin to return to normal in the first week of 2023, with some major releases scheduled. The US jobs report will headline the economic agenda, while the minutes of the December FOMC meeting are expected to receive more attention this time around since there has been no Fed speaker for a while. Other highlights will include the flash inflation readings for the Eurozone and the Canadian employment figures. 


What to watch on the Economic Calendar this week:  

Monday, Jan 02:  

  • EUR: Eurozone Final Manufacturing PMIs 

Tuesday, Jan 03:  

  • EUR: German Preliminary CPI 
  • CHF: Swiss Manufacturing PMI 
  • EUR: German Unemployment Report 
  • GBP: UK Final Manufacturing PMI 
  • CAD: Canadian Final Manufacturing PMI 
  • USD: US Final Manufacturing PMI 
  • All: OPEC-JMMC Meetings 

Wednesday, Jan 04:  

  • CHF: Swiss CPI (Dec) 
  • EUR: Eurozone Final Services PMIs 
  • USD: US ISM Manufacturing PMI 
  • USD: US JOLTS Jobs Openings 

Thursday, Jan 05:  

  • USD: FOMC Meeting Minutes 
  • GBP: Final Services PMI 
  • USD: ADP Employment Report 
  • USD: US Initial Unemployment Claims 
  • USD: US Final Services PMI 

Friday, Jan 06:  

  • EUR: German Factory Orders and Retail Sales 
  • CHF: Swiss Retail Sales 
  • GBP: UK Construction PMI 
  • EUR: Eurozone Flash CPI Estimate 
  • CAD: Canadian Employment Report 
  • USD: US Non-Farm Payrolls Report 
  • CAD: Canadian Ivey PMI 
  • USD: US ISM Services PMI 

USD: How long will the tight labor market last? 

The Federal Reserve raised interest rates by a cumulative 425 basis points in 2022, however, labor markets remained relatively strong through the tightening cycle, causing frustration among policymakers. Other sectors of the economy, such as housing, are clearly showing cracks, and even consumer spending softened in November. In the meantime, we will have to wait and see how long the tight labor market can last. 

There have been several high-profile layoff announcements in recent months, yet the unemployment rate has only increased marginally to 3.7%, while nonfarm payrolls have risen between 250k and 300k since September. Historically, payroll changes have been forecast at 200k for the past few months, and this remains the case for the December report as well. 

Weekly Market Outlook 2nd January 2023

In light of Fed Chair Powell’s hawkish pushback in December, investors may be paying particular attention to continued strength in the employment data and to average hourly earnings, which accelerated in November to 5.1% from 5.0%. 

The ISM manufacturing and non-manufacturing PMIs due on Wednesday and Friday may provide some relief for the markets if Friday’s NFP report beats expectations again. The former is expected to fall further below 50 in December, while the latter is expected to remain stable. The JOLTS job openings report (Wednesday), the ADP employment report (Thursday), and factory orders are other data sets to be released this week (Friday). 

Can Fed minutes boost the dollar? 

In light of recent upbeat indicators that have only raised fears that the Fed will overtighten, causing the economy to spiral into a steeper recession, the US dollar has struggled to gain much from them. On Wednesday, the December FOMC minutes are due, which may result in a lose-lose situation for the currency. 

Considering that Fed speakers have largely been silent since the last meeting, the minutes could offer some new insight into the level of confidence policymakers have about inflation coming down substantially over the next year as well as how concerned they are about triggering a recession. In the event that the minutes downplay growth concerns, the dollar might be better able to withstand any data-driven selloffs. 


CAD: Canadian jobs report to watch 

The Canadian government will also be reporting employment information on Friday. The labor market in Canada likely lost some steam in December and is projected to have added just 7.5k jobs versus 10.1k in November. On the whole, the labor market is tight and wage growth has been above 5% since June, so the unemployment rate is projected to tick up to 5.2%. 

Weekly Market Outlook 2nd January 2023

In spite of this, policymakers at the Bank of Canada believe they have already tightened policy enough and that the decision on whether to hike or keep rates unchanged in January will likely be a coin toss. It has been quite damaging for the local dollar to expect that the BoC will be the first to pause its rate hike campaign. In spite of outperforming its Aussie and kiwi counterparts early in 2022, the loonie faltered as the year came to an end. 

If the upcoming US job figures do not outweigh the Canadian ones, the currency could gain a small boost.


EURO: Has inflation peaked in the Eurozone? 

The European markets will be back in full swing right after the New Year celebrations, with a fairly busy week ahead. It’s likely that investors will pay close attention to the flash inflation estimates for December, but there are a variety of other releases that could also attract attention. 

The final manufacturing PMI readings will be released on Monday, and the final services PMI readings will be released on Tuesday. Besides the November retail sales and the December economic sentiment indicator that are due on Thursday and Friday, Euro area producer prices and November retail sales will shed light on the economy’s health. In addition to Dutch data, German data are also important, including trade figures for November and orders for industrial goods on Friday. 

Weekly Market Outlook 2nd January 2023

The ECB’s Klaas Knot recently said that the bank is just halfway through raising its interest rates. Even if Friday’s inflation numbers come in soft, they might not stir up a major reaction for the euro, but they would likely offer some relief to policymakers anyway. 

According to expectations, the harmonized index of consumer prices (HICP) will ease from 10.1% to 9.7% in December. There is hope that inflation has peaked in the euro area if this is confirmed, although underlying measures may not be as optimistic as they appear. The HICP excluding food and energy is predicted to drop by just 0.1 percentage point to 6.5%, while it will remain unchanged at 5.0% when alcohol and tobacco prices are excluded. 

It appears that the euro is about to break out of its narrow range, as it has been in a very narrow range over the past two weeks. Currently, the question is, are we going to finally see the euro break through $1.07 after hovering under the level for so long, or is the dollar going to make a comeback, pushing the pair to $1.05? We will have to wait and see!


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