Weekly Market Outlook: Focus on US inflation data, UK data on recession risks

Weekly Market Outlook: Focus on US inflation data, UK data on recession risks

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Weekly Market Outlook – Markets will be looking forward to next week’s CPI data coming out of the United States amid ongoing concerns about Fed policy after a choppy start to the new year. The Australian Bureau of Statistics will release inflation figures as well as the United Kingdom’s monthly GDP figures, which could stoke recession fears once again. China’s economy will also be on investors’ minds as December’s economic indicators are released. However, the Fed’s chairman Jerome Powell’s participation in a gathering of central bankers in Sweden may have a greater impact on markets.

What to watch on the Economic Calendar this week:   

Monday, Jan 09: 

  • EUR: Germany Industrial Production (NOV) 
  • EUR: French Trade Balance 
  • EUR: EU Unemployment Rate (NOV) 
  • GBP: BRC Retail Sales Monitor y/y 
  • JPY: Tokyo CPI (DEC) 

Tuesday, Jan 10:   

  • EUR: French Industrial Production m/m 
  • CAD: BoC Governor Macklem Speech 
  • USD: Fed Chairman Powell’s Speech 
  • JPY: BoJ Governor Kuroda Speech 
  • USD: IBD/TIPP Economic Optimism (JAN) 
  • AUD: CPI (NOV) 
  • AUD: Retail Sales (NOV) 

Wednesday, Jan 11:   

  • EUR: Italian Retail Sales m/m 
  • USD: Crude Oil Inventories 
  • AUD: Trade Balance 
  • CNY: CPI (DEC) 
  • CNY: PPI y/y 

Thursday, Jan 12:   

  • USD: CPI (DEC) 
  • USD: Unemployment Claims 

Friday, Jan 13:   

  • GBP: UK GDP (NOV) 
  • GBP: UK Industrial Production (NOV) 
  • GBP: UK Manufacturing Production (NOV) 
  • EUR: French Final CPI m/m 
  • GBP: UK Trade Balance (NOV) 
  • EUR: Industrial Production (NOV) 
  • EUR: Trade Balance (NOV) 
  • USD: Michigan Consumer Sentiment Prel (JAN) 

USD: Will US CPI continue to decline? 

Despite the fact that markets have given up on an early Fed pivot, they are still not convinced that rates must be raised too high to become restrictive. Thursday’s consumer price index will be the next vital release that can either strengthen or undermine policymakers’ warnings about future rate increases. 

The US inflation rate is clearly on the decline. Now we must ask: how long will it take for it to fall back to within the Fed’s 2% goal? And is it possible for it to creep back up before we reach it? Further evidence of this will be provided by the December CPI readings.  

Weekly Market Outlook

The American inflation rate could drop below 7% in December for the first time since October, after falling to 7.1% in October. It is predicted that the month-over-month rate will remain at 0.1%, but the core measure may rise from 0.2% to 0.3%. 

Friday, the University of Michigan’s consumer sentiment survey will provide more information on inflationary pressures. In spite of consumer sentiment barely recovering from all-time lows and only a slight increase expected in January, inflation expectations have improved. If there is a further decline in January, this could lift sentiment at the end of the week, since both one-year and five-year inflation expectations confirm the recent peak highlighted by the other price metrics. 

In spite of the Fed’s ultra-hawkish stance, the dollar has been directionless lately due to the rising threat of the US economy tipping into recession. It has been somewhat of a similar story on Wall Street and stocks are continuing to struggle. The inflation figures could undershoot expectations, but with worries about weakening demand growing by the day, risk assets will struggle to bounce back. 

Powell attends the Riksbank symposium 

Powell is scheduled to speak at an international symposium on central bank independence on Tuesday, organized by Sweden’s Riksbank. Among the other prominent speakers will be Bailey of the Bank of England, Macklem of the Bank of Canada, and Kuroda of the Bank of Japan, who will be departing the central bank world shortly like his host Stefan Ingves. 

However, Powell will likely draw the most attention, since he has made no public comments since the December FOMC press conference. In light of the symposium’s theme, it seems likely that Powell won’t comment on domestic policy, but any fresh insight into interest rate outlooks could boost the dollar.

CNY: How will China’s future unfold? 

Other than Fed policy, China’s Covid response has also been weighing heavily on the markets lately. For the markets, Beijing’s abrupt change of heart about the zero-Covid policy has been bittersweet after a year of endless shutdowns that have ravaged the Chinese economy.  

Weekly Market Outlook

The surge in infections has led to consumers not spending as much and businesses being disrupted by workers calling in sick, despite military-style lockdowns being a thing of the past. Commodities like oil have taken a substantial hit from this reality check as hopes of a quick economic recovery have been dashed. 

In contrast, investors may take some signs of stabilization in the data as a positive sign toward the end of the year. On Thursday, with the December CPI and PPI publications, we will have our first opportunity to determine if demand has recovered. A new set of trade numbers is due on Friday. China reported back-to-back declines in both exports and imports in October and November, underscoring the unsustainable nature of zero Covid.

AUD: Aussie may be at risk from inflation data 

The Australian dollar could benefit from any improvement in the December readings since China is Australia’s biggest export market. On Wednesday, the Australian dollar will also be affected by the CPI figures. It seems that inflation is peaking down, but the Reserve Bank of Australia might have jumped the gun by downshifting to 25 basis points hikes or even considering a pause. 

Weekly Market Outlook

Inflation at 6.9% is far too high and the RBA may underestimate how difficult it will be to bring it down to its target range of 2-3%. It is therefore possible for an upside surprise to further boost the Aussie, which has gained a massive 10% since October’s lows.

GBP: The Pound may have little to rejoice about in 2023 

The pound was one of the worst performing major currencies of 2022, despite an impressive recovery in the autumn. A further problem in 2023 could be that the uptrend has begun to falter in December. There is a very high probability that the UK economy is already in recession, and even if the energy crunch continues to subside, Britain still faces other problems. It’s not easy to put your faith in either the economy or sterling when you face a cost-of-living crisis exacerbated by Brexit, a wave of strike action unprecedented since the 1970s, a health service facing crippling pressure, and a dysfunctional government unable to deal with all the problems. 

It is likely that this week’s batch of data will serve as a reminder to investors about the challenges facing the British economy in regaining its pre-pandemic glory. In November, GDP is expected to have contracted again after rebounding in October. For the same month, trade numbers and breakdowns will be released, along with industrial production figures. 

There is a possibility of positive surprises, but the risk to the pound is generally skewed to the downside. Cable is unlikely to match its December peak of $1.2445 in the near future unless the dollar suffers a significant selloff.

Weekly Market Outlook

EURO: The Euro stays in good stead against the dollar 

In the euro area, most of the data is from the second tier, with the biggest one being the November German industrial output on Monday and the Eurozone-wide print on Friday. Similar to the pound, the euro has lost some of its gains and is below its December highs, but it has been far more resilient, retaining some upward movement. There is a possibility that the euro could just break through $1.07 if the US inflation data misses expectations. 

Tuesday marks the due date for Tokyo’s December CPI estimates. Japanese inflation will be closely watched for further signs of acceleration amid intensifying speculation that the Bank of Japan will soon exit its ultra-accommodative stance.

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