Weekly Market Outlook

Weekly Market Outlook: US Inflation Eyed

Weekly Market Outlook

Key data releases will be in focus this week including US inflation numbers, UK GDP prelim figures and Australian jobs report. Highlights of this week’s economic calendar:  

  • US CPI 
  • AUD Job Report  
  • UK Prelim GDP 
  • Fed Chair Powell Speaks 
  • BOE Gov Bailey Speaks 
  • US Producer Price Index 
  • China CPI  

Will Inflation Threaten the Greenback’s Gains?  

The US Dollar Index hit a 13-month high near 94.6 last week boosted by improved risk appetite, strong labor market data and tapering asset purchases by the Fed.  The US economy added 531 thousand jobs in October and unemployment rate fell further to 4.6%. Meanwhile, wages posted another strong growth amid labor shortages.  

Annual inflation is expected to pick up well below 6% in October, backed by higher wages and rising energy prices. Inflation has been stabilizing near its 13-year high at 5.4% since June, forcing the Federal Reserve to being tapering its pandemic massive stimulus. Core inflation, that excluded volatile food and energy prices, is anticipated to stabilize at 4% for the third consecutive month.  

USD investors are now paying much attention to economic numbers as the main gauge for the Fed’s tapering pace. Two rate hikes by late 2022 are already priced in given the strong economic activity, soaring inflation and robust job market. Strong CPI prints can offer another boost to the dollar, especially against rivals whose central banks are stuck in expansionary policies like the Euro, Aussie and Japanese Yen. 

Fed Chairman Jerome Powell will participate in two events this week, his remarks to be closely watched by investors in case of delivering any policy clues.  

The Federal Reserve announced last week it will begin tapering the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities from the current $120 billion a month, starting later this month. 

The Committee noted that inflation is elevated and supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors. Still, the fed expects price pressures to be transitory despite the board acknowledgment that inflationary pressures are persistent, but seems they are not persistent enough to drop off the “transitory” word yet. 

The Fed Chairman, Jerome Powell, stated in the press conference that the bank can be patient on rate hikes but will not hesitate to act if inflation remains elevated. 

Can Job Market Support the RBA’s Hawkish Stance? 

October’s job numbers are due on Thursday amid recovery hopes and rising sentiment boosted by the accelerating vaccine rate nationwide and economy reopening. The Australian economy is expected to add 50 thousand jobs in October, after continuous job losses for the last couple of months. Unemployment rate, however, may rise to 4.8% from 4.6% in September.  

The Reserve Bank of Australia discontinued the 0.1% yield target on April 2024 government bond during its November meeting. The board also dismissed its prior statement that rates were unlikely to rise until 2024. These actions reflected the bank’s shift to a hawkish stance, fueling expectations for a sooner rate hike. 

The central bank kept the cash rate on hold at a record low of 0.1% for the 12th month in a row, and maintained buying government bonds at its current weekly pace of A$4 billion until at least mid-February 2022. 

The RBA noted the decision to terminate the yield target reflects the economic improvement and the earlier-than-expected progress over the inflation target. 

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