- US CPI data in focus ahead of Fed decision next week, dollar flat
- Stocks pare weekly gains as Evergrande default unnerves markets
- Pound holds near lows after GDP miss, euro reverses back down
Spotlight on US inflation
After making a strong recovery this week, risk appetite is being tested as the all-important inflation test looms for the markets. The US consumer price index is due at 13:30 GMT and the forecasts are pointing to another big jump in November. If the annual CPI rate hits 6.8% as expected, the Fed will be inclined to speed up the winding down of its asset purchase program as the last time the country faced price growth in the 7% region was at the end of the Great Inflation era of 1965-1982.
Fed officials have been quite loud in signalling that tapering may need to be accelerated and even Powell himself is now questioning the long-held narrative that this burst in inflation will be transitory. But it’s not just about inflation. The labour market is also running hot and weekly jobless claims were at their lowest since 1969 last week.
The Fed holds its final meeting of the year next week and markets are bracing not only for a quicker exit from QE but also a steeper dot plot with an earlier liftoff date.
Short-dated Treasury yields continued to climb today, with the two-year yield reaching another high, while the 10-year yield clawed back some of yesterday’s decline. This kept the US dollar well supported, which had come under pressure earlier in the week as fears about the Omicron variant subsided.
However, the threat from Omicron has not completely dissipated and markets may just be realising that this new mutation still poses significant risks to the growth outlook. The UK and Europe have tightened their restrictions and fresh curbs in the US are possible too given that the Omicron strain may be up to four times more transmissible than Delta even if its symptoms are less severe. This reality check is likely contributing to slight dampening in the mood on Friday.
Stocks break winning streak but US futures turn north
For equity markets, there is a bit of profit-taking occurring as well after Wall Street recorded three days of solid gains. The S&P 500 slipped 0.7%, mainly dragged lower by tech shares as the Dow Jones closed flat.
In Asia, aside from the dip on Wall Street, traders also had to contend with more bad news coming out of China’s embattled real estate sector. Property giant Evergrande and smaller rival Kaisa both missed their coupon payments on international bonds after the 30-day grace period elapsed, according to Fitch Ratings, which downgraded the two companies to ‘restricted default’ rating.
Hong Kong’s Hang Seng index slid just over 1% but the wider fallout appeared to be minimal as investors had been anticipating that a default would come eventually. The expectation is that Evergrande’s collapse will be carefully managed now that the firm’s restructuring has been taken over by the Chinese government.
European shares followed their Asian counterparts lower but US stock futures turned slightly positive, suggesting the week may yet end in the green, barring no shocks in the US CPI numbers.
Euro and pound look shaky ahead of big week
In the currency markets, the euro succumbed to the stronger dollar, dropping back below $1.13. The coming week will likely be a struggle for the single currency as the ECB looks set to beef up its regular bond purchase program to compensate for the end of the pandemic program in stark contrast to the Fed’s faster exit plan.
The pound regained some footing but was unable to make much headway above $1.32 following some disappointing GDP figures out of the UK today. Britain’s economy barely grew in October as supply chain issues capped industrial output. The data has further dashed expectations that the Bank of England will raise interest rates next week.
Other majors were mostly steady, apart from the kiwi, which was last down by more than 0.3%.
