A welcome distraction
It’s been quite the start to the year, with omicron fears subsiding only to be replaced by interest rate anxiety once more. This could be the theme for the coming months, as policymakers are forced to take inflationary pressures more seriously in the hope that a little now will prevent the need for a lot more later.
Earnings season may bring a welcome distraction at a time when fear has again become a dominant driver of the markets. While inflation uncertainty is a major risk, it is worth remembering that the economy is in a very good place and the reporting season, starting next week, should provide a timely reminder of that.
Finally, it’s worth noting that there are various other volatility drivers in the markets at the moment and Russia is only involved in most of them. Although Putin did manage a sly dig at the CBRT in his annual address while praising his own central bank’s approach to inflation. It doesn’t seem President Erdogan has too many allies in his pursuit of low inflation through lower interest rates.
The coming week will include a very hot inflation report, the banks kicking off earnings season, US-Russia talks, and a bunch of Fed speak. Inflation is not letting up and will continue to make the Fed uneasy. On Wednesday, the headline year-over-year inflation reading is expected to rise from 6.8% to 7.1%, which is nearly a four-decade high. The last trading day of the week is filled with economic releases that should show a deceleration with retail sales, import price index, industrial production, and consumer sentiment.
Data next week is primarily made up of tier two and three releases which will have little bearing on the central bank in the coming months. Pressure is mounting after inflation hit another record high in December. Traders will be looking for any sign that policymakers will buckle under the pressure despite being assured until now that inflation is transitory.
The tightening cycle got underway in December and traders will continue to monitor the data as markets price in four more hikes this year. But next week is void of tier-one releases, with the most notable being the NIESR GDP estimate on Monday and the official monthly GDP reading on Friday.
The highlight next week on the data front is inflation on Wednesday, with CPI seen falling slightly to 8.2%. This is still more than double its 4% target but heading in the right direction after an aggressive series of rate hikes from the central bank.
The focus will remain on other activities when it comes to Russia, as is so often the case. Whether that’s activity on the Ukrainian border, gas supplies to Europe (or lack of), or involvement in Kazakhstan.
Next week is looking quiet with manufacturing production the only economic release of note.
Turkey continues to prefer unconventional approaches to support the currency as it pursues lower interest rates at all costs. So far that has come in the form of soaring inflation (now at 36%) and a large portion of FX reserves as it tries to manipulate the currency and support state-owned businesses. Burning through reserves isn’t sustainable and while the lira is off its lows, it’s been sliding over the last couple of weeks. Erdogan is becoming more desperate and appears in no mood to change course.
Chinese property developers will dominate weekend news with Evergrande in a race to roll over CNY 4.5 billion of local denominated debt by this weekend. How this story evolves will determine whether Chinese equities continue retreating or recover on Monday. Additionally, the government appears to be moving towards treating debt used to buy up weak developers by SOE’s separate from official debt ratios. If confirmed as correct, it’s potentially bullish for China/HK equities.
China CPI on Wednesday won’t move the needle, but if the official trade balance falls on Friday sharply, that could weigh on local equities.
Watch for widening lockdowns of cities across China as omicron proves stubborn to remove.
The Indian Rupee is surprisingly resilient as other Asian currencies sell-off. The rally in post-omicron sentiment has renewed hot money inflows into India, supporting the INR and local equities. Watch the caseload in India however, it is rising quickly and will be a test of the premise that non-RNA vax countries will also see fewer hospitalizations. Potentially negative if incorrect.
Inflation on Friday has upside risks which could be a stagflationary negative for the INR and Sensex into the end of the week.
No significant data. Watch for increasing state-wide restrictions as Omicron cases skyrocket. Harsher restrictions could be equity and AUD negative.
AUD is being driven by risk sentiment which is cautious in currency markets as US yields firm up on Fed tightening expectations.
No significant data.
NZD fading on Fed tightening sentiment as per AUD.
Watch for headlines of community omicron transmission, which could be a short-term negative for NZD and local equities, and RBNZ Feb hike could be postponed…again.
No significant data this week. USD/JPY remains at the mercy of the US/Japan rate differential. That widened this week as US yields soared pushing USD/JPY to 116.00. The Ministry of Finance has started “watching FX” rhetoric, signaling concern at the pace of decline.
The Nikkei continues to show a high correlation to directional movements on the Nasdaq. The BoJ quietly indicated this week they would not look to expand the balance sheet. The upcoming JGB auction this week, if poorly supported, could be a short-term negative for equities.
Saturday, Jan. 8
- Atlanta Fed President Bostic and the ECB’s Schnabel speak at The American Economic Association/Allied Social Science Association virtual annual meeting continues
Sunday, Jan. 9
- The BOE’s Mann speaks at the virtual AEA meeting.
- Bilateral U.S.-Russia negotiations to begin in Geneva
- Iraq’s parliament convenes
Monday, Jan. 10
- US wholesale inventories
- Atlanta Fed President Raphael Bostic speaks at the Rotary Club of Atlanta
- Australia building approvals
- Eurozone unemployment
- Italy unemployment
Tuesday, Jan. 11
- Fed Chair Jerome Powell’s confirmation hearing in the Senate Banking Committee.
- Kansas City Fed President George speaks
- St. Louis Fed President Bullard speaks
- Australia trade balance, retail sales
- Mexico international reserves, industrial production
- South Africa manufacturing production
- Spain industrial production
- Turkey current account
Wednesday, Jan. 12
- US CPI, Fed’s Beige Book, WASDE agricultural report
- China PPI, CPI
- Japan BOJ Governor Haruhiko Kuroda speech at the Branch Managers meeting.
- Eurozone industrial production
- India industrial production, CPI
- Russia CPI
- EIA Crude Oil Inventory Report
Thursday, Jan. 13
- US initial jobless claims, PPI
- US Senate Banking Committee hearing for Lael Brainard nominated as Fed vice-chair.
- Richmond Fed President Barkin speaks at an event hosted by the Richmond Chamber of Commerce.
- Philadelphia Fed President Harker speaks at the Philadelphia Business Journal economic event.
- Chicago Fed President Evans speaks at an event hosted by the Milwaukee Business Journal.
- Turkey industrial production
- Italy industrial production
- Japan M2 money stock
- New Zealand building permits
- Norway Norges Bank 4Q survey of bank lending
Friday, Jan. 14
- US Bank Earnings Season Begins: JPMorgan, Citigroup, and Wells Fargo report before the bell
- New York Fed President John Williams speaks at the Council on Foreign Relations.
- US retail sales, business inventories, industrial production, consumer sentiment
- China trade
- India trade, wholesale prices
- France CPI
- Japan PPI
- Spain CPI
- UK industrial production