Weekly Market Outlook

Weekly Market Outlook: US Inflation and Powell’s Testimony in the Spotlight

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Weekly Market Outlook: The spotlight will be taken by US inflation data and Fed chair testimony this week. Investors will be watching major data releases on the economic calendar including UK monthly GDP figures and China CPI as pressures are expected to ease. Elsewhere, the preliminary estimate of Germany’s GDP is expected to show a 2.7% growth in 2021. Europe’s largest economy to show a solid recovery from the pandemic crisis. 

NFP Disappoints, all Eyes on CPI Inflation 

The US Non-Farm employment grew by 199 thousand in December 2021, well below market forecasts of 426K. Employment numbers for November were revised higher by 39,000 from 210K to 249 thousand. 

US employment has increased by 18.8 million since April 2020, but is still down 2.3%, or 3.6 million, from its pre-pandemic levels in early 2020. Meanwhile, the unemployment rate declined to 3.9%. In 2021, average hourly earnings have increased by 4.7%.

Weekly Market Outlook - US Non-Farm Payrolls 2021

This week, all eyes turn to December’s inflation data on Wednesday. Annual inflation will probably jump to 7.1% in 2021, the highest since 1982, and 5% higher than the Fed’s inflation target at 2%. Such data will fuel expectations for a faster tightening pace and affirm a rate hike in March. FOMC minutes released last week already revealed that policymakers have discussed plans for faster rate hike and policy normalization. 

Fed Chair Jerome Powell will be testifying before the Senate on Tuesday. FOMC members Ester, George and Williams are due to speak this week. All are voting members in 2022. SO, hawkish comments should boost the US Dollar performance. 

Other notable economic data to be watched are the Producer Price Index (PPI) and Retail Sales that would reveal how consumer spending is performing. 

UK GDP in Focus 

The cable reversed from its pandemic lows as BoE joined the tightening cycle and despite the growing concerns over the Omicron spread. The health situation has been declared “very difficult” and the country may have to impose new curbs to contain the variant spread across the country, despite official comments that new restrictions are unlikely. 

Market participants are expecting another rate hike in February, and aiming for three more hikes before the year end. Stronger growth data will pave the way for a stronger pound against low yielding currencies like the Japanese Yen and Euro. 

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.

China Inflation Expected to Cool Down 

Inflation rate is anticipated to cool down back to its track in December, after a surge recorded in the previous month. CPI inflation climbed to the highest since August 2020 at 2.3% in November from 1.5% a month earlier. The spike was justified by seasonal demand and the rise of food prices for the first time in six months. Expectations point to a slower price pressure in December, with a 1.8% annual rise. Gloomy outlook for the Chinese economy still burdens global demand, adding more pressure on commodity-linked currencies like the Aussie and Kiwi. 

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