Sample Category Title

EUR/AUD edged higher to 1.5747 last week but failed to sustain above 1.5704 resistance and retreated. Initial bias remains neutral this week first. But further rally is expected as long as 1.5271 support holds. On the upside, firm break of 1.5747 will resume larger rally from 1.4281. Next target is 61.8% projection of 1.4281 to 1.5704 from 1.5271 at 1.6150.

In the bigger picture, as long as 1.5271 support holds, rise from 1.4281 medium term bottom is expected to continue to 1.6434 key resistance next. However, firm break of 1.5271 will argue that such rebound has completed, and keep medium term outlook neutral at best. But in this case, more range trading should be seen above 1.4281 low first.

In the longer term picture, focus is on 55 month EMA (now at 1.5591). Sustained trading above there will raise the chance of bullish trend reversal, and at least bring further rally to 1.6434 cluster resistance, 38.2% retracement of 1.9799 (2020 high) to 1.4281 at 1.6389. However, rejection by the EMA will revive the chance of down trend resumption through 1.4281 at a later stage.

EUR/CHF extended the sideway consolidation from 0.9953 last week and outlook is unchanged. Initial bias stays neutral this week first. On the upside, firm break of 0.9953 resistance will resume larger rally from 0.9407 to 1.0072 fibonacci level. However, break of 0.9720 will extend the decline from 0.9953 to 61.8% retracement of 0.8407 to 0.9953 at 0.9616.

In the bigger picture, price actions from 0.9407 medium term bottom are currently seen as a corrective pattern, rather than trend reversal. Down trend resumption through 0.9407 is mildly favored at a later stage. This will remain the favored case now, as long 38.2% retracement of 1.1149 to 0.9407 at 1.0072 holds.

In the long term picture, capped well below 55 month EMA, EUR/CHF is seen as extending the multi-decade down trend. There is no prospect of a bullish reversal until firm break of 1.0505 support turned resistance (2020 low). In case of resumption, next target is 138.2% projection of 1.2004 to 1.0505 to 1.1149 at 0.9033.

Trading in the markets was rather subdued last week. Canadian Dollar was an exception, as it was pressured by falling oil price and a dovish BoC hike. The Loonie just closed marginally higher against Yen, which was also soft. On the other hand, Swiss Franc was the best performer, followed by the resilient Aussie and Kiwi. Dollar didn't perform too badly but it's overall lackluster. Euro and Sterling ended mixed.

Looking ahead, four major central banks will meet this week, and then market will turn into year-end holiday mode. Fed's meeting will carry slightly larger significance than ECB, BoE and SNB, as new economic projections will also be published. Judging from the actions in stocks and yields, traders might be guarding against a hawkish set of forecasts.

CAD down on BoC and oil prices, AUD Lifted by China

Canadian ended the week broadly lower, except versus Yen. BoC clearly said that it's "considering whether the policy interest rate needs to rise further". That is, last week's 50bps rate hike could be the last in the current tightening cycle. Meanwhile, oil prices extended recent down trend and slumped back to pre-Ukraine war levels.

WT hit as low as 70.34 and 70 handle now looks rather vulnerable. In any case, near term outlook will stay bearish as long as 83.82 resistance holds. Current down trend should target 61.8% projection of 124.12 to 76.61 from 94.25 at 64.88. Such development would continue to weigh on Canadian Dollar.

Australian Dollar ended slightly on the stronger side. RBA's 25bps might look small comparing to other major central banks. But the board meets on monetary policy 11 times a year, comparing to 8 FOMC meeting. RBA is also not finished with tightening yet. Additionally, Aussie was supported by easing of restrictions in China, which boosted industrial metal prices too.

The Chinese Yuan strengthened notably together with stocks in China and Hong Kong last week, on optimism over reopening. USD/CHN should have completed a head and shoulder top reversal pattern (ls: 7.2670, h: 7.3745, rs: 7.2567). Deeper decline is now in favor. The real test for Yuan is probably at 6.8372 resistance turned support in USD/CNH, which is close to 50% retracement of 6.3057 to 7.3745 at 6.8401. It will need significant progress to break through this level. Otherwise, the support to Aussie could be short-lived.

AUD/CAD's rise from 0.8596 continued last week and accelerated to as high as 0.9275. The strong break of the medium term channel resistance argues that whole down trend from 0.9991 (2021 high) has completed with three waves down to 0.8596. Further rally is expected as long as 0.9093 support holds. Next target is 0.9514 resistance, and reaction from there would reveal the underlying medium term momentum in the cross.

US stocks and yields turning around?

Traders and investors have turned more cautious ahead of the upcoming FOMC announcement on December 14. A 50bps rate hike by Fed is pretty much a done deal, and the focus is actually on the new economic projections, which should guide the market in estimating the level of terminal rate of the current cycle, and the time to stay there. Judging from the price actions in stocks and bonds, the markets might be leaning towards some hawkish forecasts.

A short term top is likely in place at 34595.51 in DOW, after failing to sustain above 34281.36 resistance Break of last week's low at 33418.59 will extend the correction to 55 day EMA (now at 32729.03), or even further to 38.2% retracement of 28660.94 to 34595.51 at 32328.50.

10-year yield spiked lower to 3.402 but quickly recovered to close at 3.567. The near term focus remains on whether TNX could defend 3.483 resistance turned support. Break of 3.798 resistance will suggest short term bottoming and bring stronger rebound back above 4% handle, "towards 4.333 high. However, sustained trading below 3.483 will open up deeper decline to 3% handle or even further to 55 week EMA (now at 2.921).

Dollar index has been losing some downside momentum as seen in daily MACD. It's trying to draw support from 104.63, as well as 55 week EMA (now at 104.03). Yet, there is no clear sign of rebound yet. On the upside, break of 107.19 resistance will indicate short term bottoming and bring stronger rise to 55 day EMA (now at 108.03) and above. However, sustained break of 104 will open up deeper decline to 100 handle, and possibly below to 61.8% retracement of 89.20 to 114.77 at 98.96. The next move will depend more on development in stocks than yield.

USD/JPY Weekly Outlook

USD/JPY retreated after recovering to 137.84 but there was no clear downside momentum. Initial bias is neutral this week first. On the upside, break of 137.84 resistance will revive the case of short term bottoming at 133.61, and turn bias back to the upside for 55 day EMA (now at 141.02). However, break of 133.61 will resume the decline form 151.93 through 133.07 fibonacci level.

In the bigger picture, price actions from 151.93 medium term could be just a corrective pattern to up trend from 102.58 (2021 low). Strong support from 38.2% retracement of 102.58 to 151.93 at 133.07 and 55 week EMA (now at 131.52) will set the range for such corrective pattern. However, sustained break of 55 week EMA will pave the way to 61.8% retracement at 121.43.

In the long term picture, rise from 102.58, as part of the up trend from 75.56 (2011 low) was put to a halt at 151.93, just ahead of 100% projection of 75.56 to 125.85 from 102.58 at 152.87. There is no clear sign of long term reversal yet. Such up trend is expected to resume at a later stage, as long as 125.85 resistance turned support holds.

Monday, Dec 12, 2022

Tuesday, Dec 13, 2022

Wednesday, Dec 14, 2022

Thursday, Dec 15, 2022

Friday, Dec 16, 2022

U.S. Highlights

• Somewhat unexpectedly, the ISM services index accelerated in November, with the business activity sub-index expanding to a level last seen in 2021.
• The services sector continues to struggle with elevated inflation as the prices paid component of the ISM services index and the services side of the producer price index showed no signs of price relief.
• Despite higher rates, consumers continued to borrow to support their spending. This underscores the degree of resilience of the U.S. consumer but increases prospects for a weaker economy next year as the Fed will have to move into more restrictive territory.

Canadian Highlights

• The Bank of Canada delivered another 50-basis point hike, raising the overnight rate to 4.25%. There was also a notable shift in the Bank’s forward-looking language, which removed any reference to further hikes being needed.
• Next week’s release of the national balance sheet accounts is expected to show that consumers spent more of their income on debt servicing costs in the third quarter as higher interest rates began to reach some households.
• Activity in the housing market continues to be depressed by high borrowing costs, but the correction may be nearing the end. Next week’s release of November’s housing data is expected to echo this, showing relatively modest drag on activity and prices.

U.S. - Waiting for the Fed

A slow week on the economic data front gave markets time to reflect and prepare for the FOMC meeting next week, which will include an update to the Fed’s economic projections. The consensus has solidified for a 50-basis points (bps) hike, but the Wall Street jury is out on how far the Fed will have to raise policy rates this cycle. Price volatility this week underscores increasing concerns that higher policy rates could tip the U.S. economy into recession.

On Monday, the ISM Services index reported an acceleration in the services sector. Somewhat unexpectedly, the business activity sub-index expanded by whooping nine percentage points lifting it to a level last seen in 2021. This is in stark contrast with the manufacturing sector’s production index, which moved into contractionary territory. The pick-up in services activity was backed by remaining pent up demand, further boosted by the start to the holiday season as industries like Accommodation & Food Services and Retail Trade entered their busiest month of the year.

The prices sub-indexes reinforce the contrast between the two sectors. While the manufacturing sector has seen a significant deterioration in the prices paid component, which contracted in November with a reading of 43, it’s taking much longer for the services sector to see signs of price relief, with the sub-index remaining mired around 70 (Chart 1). Higher prices also appear to be broad-based with 16 out of 18 industries reporting higher prices. The Producer Price Index (PPI) for November provided another example of the sectoral divergence in price pressures. The PPI advanced by 0.3% month-on-month in November, driven by a 0.4% increase rise in services prices.

Tuesday’s trade data showed that goods exports declined in October, with a notable weakness in industrial supplies and materials (includes petroleum products), providing more evidence of dwindling demand from overseas. This contributed to a widening in the trade deficit to $78.2 billion. Imports also improved marginally supported by an increase in domestic demand for foreign goods, partially offset by weaker services imports from abroad.

Consumer demand has proven a bit more resilient recently, and it looks to have been supported by consumer credit, which continued to expand in October despite higher interest rates. Consumer credit outstanding increased by $27.0 billion on the month (7.1% annualized), driven by nonrevolving credit, which gained $17.0 billion (Chart 2). Revolving credit added $10.1 billion, reflecting consumers stronger reliance on credit card debt as pandemic savings continue to dwindle. We think that consumers will add more leverage to support real spending growth of roughly 1.5% in 2023 – a step down from 2.8% expected in 2022.

That forecast underscores the degree of resilience coming from the U.S. consumer, but the cumulative effect of higher interest rates may create stronger headwinds than currently anticipated. Stronger domestic demand and higher inflation increases prospects that the Fed will have to move rates into more restrictive territory. Wednesday’s FOMC decision will feature the dot plot, so we won’t have to wait much longer to see the Fed’s latest thinking.

Canada – The End of the Hiking Cycle Is In Sight

This week's economic highlight was the Bank of Canada interest rate announcement. As expected, the central bank delivered another 50-basis point hike, raising the overnight rate to 4.25%. As a justification of its decision, the Bank stated that while there were signs that the economy was slowing, particularly in the interest-rate sensitive areas such as housing and consumption, it was still in excess demand territory and that further cooling was required. Ditto for inflation. While acknowledging that supply chain bottlenecks have improved and the three-month rate of change in core inflation has come down, overall inflation remained high and inflation expectations elevated.

However, perhaps more interesting than the interest rate decision itself, was the notable shift in the Bank's forward-looking language, which removed any reference to further hikes being needed. This suggested that the Bank is nearing the end of its rapid-fire hiking cycle. This was re-affirmed by Deputy Governor Sharon Kozicki in her speech on Thursday, where she said that the central bank thinking was "moving from how much to raise interest rates to whether to raise interest rates" and that future decisions will be "more data-dependent".

Indeed, given the lagged effects of the past interest rate increases, much of the impact of higher policy rates, particularly on consumer spending, is yet to come. Next Monday's release of the national balance sheet accounts is expected to show that consumers spent more of their income on debt servicing costs in the third quarter as higher interest rates began to reach some households. This is likely just a start of a lengthy process. Our estimates suggests that the drag from higher debt servicing costs on household finances and spending will continue to intensify next year, long after the Bank of Canada ends rate hikes in Q1 of 2023 (Chart 1). Given these headwinds, we expect consumer spending and the economy to come to a near standstill next year.

While financial headwinds are still looming large, at least consumers have been getting some reprieve at the gas pump. Gasoline prices dropped by about 35 cents per liter since the start of November, and continued to edge lower this week as oil prices remained under pressure amid worries about the next year's global economic outlook.

Activity in the housing market continues to be depressed by high borrowing costs, but the correction may be nearing the end, with the market expected to bottom at the start of next year. The impact of higher rates on the housing market so far has been dramatic. Sales crated by 35% since February and are now at level last consistently seen in 2012. The MLS home prices index, which adjust for the composition of home sales, is down 11% from its peak. However, declines have been moderating recently. Next week's release of November's housing data is expected to echo this, showing relatively modest drag on activity and prices (Chart 2).

Summary

United States: Price Pressures Improving Gradually Amid Resilient Economy

• The November release of the ISM services index kicked off the week with a surprisingly strong reading on the U.S. economy. Various price metrics released this week showed some continued signs of inflation cooling, but gradually rather than rapidly.
• Next week: CPI (Tue), Retail Sales (Thu), Industrial Production (Thu)

International: Global Central Banks Continue Along Their Rate Hike Paths

• The Bank of Canada raised its policy interest rate 50 bps at this week's meeting, but signaled that further rate hikes would be increasingly data-dependent. Meanwhile, the Reserve Bank of Australia raised its policy rate 25 bps without offering any clear indication of an end to rate hikes. We expect Australia's central bank to tighten policy further next year. The Reserve Bank of India also hiked interest rates and should raise rates further in 2023.
• Next week: China Retail Sales & Industrial Output (Thu), Bank of England (Thu), European Central Bank (Thu)

Interest Rate Watch: The Fed Set to Hike 50 bps This Festive Season

• We expect to see the fed funds rate rise 50 bps to a range of 4.25%-4.50% at the conclusion of the Federal Reserve's Open Market Committee (FOMC) meeting on December 14. This represents a significant hike over the current range of 3.75%-4.00% but is still a downshift from the four consecutive 75 bps hikes at the prior four FOMC meetings.

Credit Market Insights: Consumers Continue to Draw on Credit

• Consumer credit grew $27.1 billion in October, registering a 6.9% year-over-year gain. This continued rise in new debt is the newest installment in a troubling trend for consumers, as they appear increasingly willing to both borrow and draw down savings in order to fund consumption habits.

Topic of the Week: No Money, More Problems

• This week, we focus on the personal saving rate. There has only been one month over the past 60 years in which consumers set aside less of their income than they did in October. That's both remarkable and worrying for the outlook.

Full report here.

A drop in gasoline prices in November has likely sent U.S. inflation growth lower. We expect next week’s U.S. CPI reading to come in at 7.4%. That’s down from 7.7% in October and a 9.0% peak in June. Food inflation was still likely running almost 11% year-over-year. But a decline in commodity prices means that measure has finally started to turn a corner. Excluding more volatile food and energy products, we expect core CPI held flat on a year on year basis at 6.3% while accelerating on a month over month basis following a surprise decrease in October. A 0.5% rise in November core prices from October will match the average monthly change this year. But that’s still double the average pre-pandemic pace. Much of that strength continues to reflect surging rent prices from a year ago as higher market asking rents flow through to the CPI rent index. An easing in current market rent prices means those CPI increases will slow in the year ahead.

We expect the Fed to hike the fed funds target range by another 50 points at next week’s policy decision (the day after the November CPI data), a step down from 75 bps at each of the past four meetings. Fed Chair Powell said in earlier press conference that services CPI ex-rent “may be the most important category for understanding the future evolution of core inflation.” And growth in that measure has shown signs of slowing—to an annualized 5.9% on average over the last three months from a peak of 12.8% in June. But that pace is still well above the Fed’s target. And the central bank‘s latest rate announcement cautioned against reading too much into softening inflation pressures. What’s more, recent data showed too much momentum in labour markets and consumer spending to avoid additional rate hikes.

Still, some early signs of easing in price pressures could mean interest rates are nearing sufficient levels to bring inflation back towards the Fed’s 2% inflation objective. As focus shifts from the pace of rate hikes to a possible landing spot, updated economic projections from the Federal Open Market Committee will be closely watched for changes in the expected terminal level of the fed funds target. Overall, we still think the Fed will hike by another 50 basis points in the first quarter of 2023 before pausing at the 4.75% to 5% range.

Week ahead data watch

• We expect a 1.5% increase in Canadian manufacturing sales, slightly less than the 2% early estimate from Statistics Canada. A surge in petroleum, and coal prices boosted nominal sales. Sale volumes likely edged lower.
• Canadian Housing starts likely ticked higher to 273,000 units in November, up from 267,055 units in October. Residential building permit issuance slowed to 241,000 units in October, but that’s still strong and higher earlier issuance means there’s still substantial building activity in the pipeline.
• Declines in unit auto sales and gas prices likely led to a 0.4 percent drop in U.S. retail sales in November. We expect U.S. industrial production increased by 0.4% in November thanks to a jump in utilities output while manufacturing output held flat.

US

Two blockbuster events will have Wall Street on edge as the disinflation trade may have gotten ahead of itself. The last major piece of economic news before the Fed meets will be the November inflation report which is expected to show pricing pressures are decelerating.  The headline reading from a month ago is expected to rise 0.3%, a tick lower from the pace in October.  On a year-over-year basis, inflation is expected to decline from 7.7% to 7.3%. There is still a lot more work that needs to be done with bringing inflation down, but for now, it seems the trend is headed in the right direction.

The FOMC decision will be “Must See TV” as the Fed is expected to downshift to a half-point rate-hiking pace and yet still reiterate that they are not done raising rates.  The Fed will likely show that rates could rise anywhere from 4.75-5.25%, which will be very restrictive and should lead to a quicker cooling of the labor market.

EU 

The ECB meeting next week promises to be a defining moment in the bloc’s fight against inflation. It was late to the party, very late in fact, but once it arrived it quickly started playing catch up culminating in a 75 basis point rate hike last week. The belief is that it won’t have to go as far as others in raising rates, with the terminal rate currently believed to be around 3%. That means the central bank is expected to already slow the pace of tightening on Thursday, with a 50 basis point hike, followed by another 100 over the first three meetings in the new year.

It’s not just the decision that investors will be focused on. The press conference and new macroeconomic projections will tell us everything we need to know about where the central bank sees itself in the tightening cycle and whether it is aligned with the markets.

UK

It’s all going on in the UK next week. The third week of the month brings a variety of major economic indicators including inflation, employment, retail sales, GDP and PMIs. This month has the added spice of the BoE meeting, the central bank that is arguably most stuck between a rock and a hard place among its peers.

The economy is suffering and probably already in recession, inflation is 11.1% – although that is expected to drop slightly ahead of the meeting – and the cost-of-living crisis in squeezing those households least able to cope with it most. And yet the BoE is of the belief that the only policy response is to keep hiking rates. Markets expect another 50 basis points on Thursday and a further 100-125 in the first half of next year. The central bank has previously pushed back against market positioning and we may see language to the same effect in the statement, not to mention more dovish dissent.

Russia

A week of no change is on the cards, it would appear. The CBR is expected to leave the Key Rate unchanged at 7.5% on Friday, the second consecutive hold after many months of hikes and then cuts following the invasion of Ukraine. On Wednesday, the third quarter GDP reading is also expected to be unchanged at -4% annualized.

South Africa

The political environment appears to have cooled a little but President Ramaphosa isn’t necessarily safe yet. The focus will remain on this but there’s also inflation and retail sales data in the middle of the week that will be of interest.

Turkey

A few notable data releases next week although maybe not anything that will move the needle under the circumstances. Unemployment and industrial production stand out.

Switzerland

The SNB is expected to raise its policy rate by 50 basis points to 1% next week as it attempts to get a grip of inflation. It’s currently running at 3%, above its target of below 2% and the SNB has been clear in its determination to bring it down.

China

China is facing a potential surge in cases as COVID rules are loosened. Following the protests over the zero-Covid policy in several Chinese cities last week, the Chinese government is pivoting its policy.  The elimination of key tenets of its virus elimination plan suggests they will try to learn to live with the virus.

It will be a busy and not-so-good week of Chinese economic data. At some point this week we will see the release of aggregate financing, new yuan loans, and money supply data.  On Thursday, industrial production, retail sales, fixed assets, and the surveyed jobless rate will be released, with most expecting a softer print. The PBOC is also expected to hold its 1-year medium-term lending facility rate at 2.75% as volumes (CNY) could decline from 850 billion to 500 billion.

India

All eyes will be on the November inflation report which could show a deceleration in pricing pressures coming closer to the upper boundaries of the RBI’s 2-6% target. Given the growth slowdown that is forming, inflation could continue its decline next quarter which should help finish the job of bringing it back to target.  India is also expected to see industrial production drop from 3.1% to -0.6%.

Australia & New Zealand

Following the recent RBA rate decision, investors expect the bank to be nearing the end of its tightening cycle.  The focus for Australia now shifts to business conditions/confidence and the labor market.  The Australian economy is expected to add 15,000 jobs, a slower gain than the 32,000 seen in the prior month.

New Zealand’s GDP growth will quickly cool as the latest tourist boom eases. Third quarter GDP on a quarterly basis is expected to soften from 1.7% to 0.8%.

Japan

Investors will have to be patient until the spring when the new leadership team has been created. The BOJ policy review could lead to the end of a decade-long ultra-loose monetary policy. The upcoming week is filled with economic data releases. The main highlights include the BOJ’s Tankan report which will show big manufacturers are struggling and non-manufacturing activity got a boost on easing covid rules. The November PPI report will show minimal pricing relief, while the trade deficit is expected to narrow.  The preliminary PMIs could show both manufacturing and service activity are weakening.

Singapore

It could be mostly a quiet week for Singapore with the exception of the release of non-oil domestic exports.

Economic Calendar

Saturday, Dec. 10

Economic Events

• The annual Bund Summit continues in Shanghai
• The International Coffee Organization conference takes place in Vietnam

Sunday, Dec. 11

• China FDI, Aggregate Financing, Money Supply, and New Yuan loans expected this week

Monday, Dec. 12

Economic Data/Events

• India CPI, industrial production
• Japan PPI, machine tool orders
• Kenya GDP
• New Zealand net migration
• Mexico industrial production
• Turkey current account
• UK industrial production
• Brazil’s presidential election is expected to be certified

Tuesday, Dec. 13

Economic Data/Events

• US November CPI M/M: 0.3%e v 0.4% prior; Y/Y: 7.3%e v 7.7% prior
• Australia consumer confidence, household spending
• Germany CPI, ZEW survey expectations
• Hong Kong industrial production, PPI
• Israel trade
• Italy industrial production
• Japan Bloomberg economic survey
• New Zealand home sales, food prices
• Philippines trade
• South Korea money supply
• Turkey industrial production
• UK jobless claims, unemployment
• The Bank of England releases its financial stability report
• US House Financial Services Committee holds an initial hearing on FTX’s collapse
• US President Joe Biden hosts the US-Africa Leaders Summit
• New Zealand’s government releases its half-year economic and fiscal update

Wednesday, Dec. 14

Economic Data/Events

• FOMC Decision: Expected to raise the target range by 50bps to 4.25-4.50%
• Eurozone industrial production
• India trade, wholesale prices
• Japan machinery orders, industrial production
• Mexico international reserves
• New Zealand current account GDP ratio, BoP
• Russia GDP
• South Africa CPI, retail sales
• South Korea jobless rate
• Spain CPI
• UK CPI
• EIA crude oil inventory report
• The European Union and the Association of Southeast Asian Nations will celebrate the 45th anniversary of their partnership at a summit in Brussels
• US Senate Banking Committee holds a hearing on FTX’s collapse
• The US-Africa Leaders Summit continues with keynote remarks from Biden
• The Bank of Japan will announce the outright purchase amount of Japanese government securities
• RBA Gov Lowe delivers an address at the 2022 AusPayNet Annual Summit

Thursday, Dec. 15

Economic Data/Events

• US Retail Sales, cross-border investment, business inventories, empire manufacturing, initial jobless claims, industrial production
• ECB Rate Decision: Expected to raise Main Refinancing rate by 50bps to 2.50%
• BOE Rate Decision: Expected to raise rates by 50bps to 3.50%
• Switzerland rate decision: Expected to raise rates by 50bps to 1.00%
• Norway rate decision: Expected to raise rates by 25bps to 2.75%
• Mexico rate decision: Expected to raise rates by 50bps to 10.50%
• Australia unemployment, consumer inflation expectation
• Canada existing home sales, housing starts
• China medium-term lending, property prices, retail sales, industrial production, surveyed jobless
• Eurozone new car registrations
• France CPI
• Japan tertiary index, trade
• New Zealand GDP
• Nigeria CPI
• Poland CPI
• Spain trade

Friday, Dec. 16

Economic Data/Events

• US deadline for a new funding deal to avert a federal government shutdown
• US markets observe “Triple witching”, which is the quarterly event where the expiry of stock and index options occur with those of index futures
• US preliminary PMIs
• Australia preliminary PMI readings
• European flash PMIs: Eurozone, Germany, UK, and France
• Hong Kong jobless rate
• Italy CPI, trade
• Japan PMIs, department store sales
• New Zealand PMI
• Russia rate decision: Expected to keep rates steady at 7.50%
• Singapore trade
• Thailand foreign reserves, forward contracts, car sales
• Bank of Finland Governor Rehn speaks on the Nordic nation’s economy
• South Africa’s governing party begins its five-yearly elective conference in Johannesburg

Sovereign Rating Updates

• Luxembourg (Moody’s)

A decisive week lies ahead for the dollar, featuring the latest US inflation and retail sales reports, alongside a critical Fed decision. Business surveys suggest inflationary forces continued to abate, although elevated rents might offset some of that. Meanwhile, a half-point rate increase by the Fed is already locked in, putting the emphasis mostly on the updated ‘dot plot’ projections. 

Managing risks

The US economy finds itself at a crossroads. Most leading indicators suggest a storm will hit next year. New business orders are contracting, the housing market has started to crack, consumer morale is low, retailers are swimming in inventory they cannot unload, and the yield curve inversion continues to deepen. All these are classic recession warnings.

However, this weakness in leading indicators hasn’t been reflected in the ‘official’ data yet. The labor market is still in good shape, consumer spending remains resilient, and inflation is sizzling hot. Economic momentum hasn’t evaporated yet despite the barrage of rate increases, mostly because monetary policy works with long lags.

Still, this dichotomy between backward and forward-looking indicators is a headache for Fed officials. Since the full impact of the rate increases they’ve already rolled out hasn’t been felt yet, there’s a danger they will inflict unnecessary economic damage if they keep pressing ahead. As such, the Fed chief changed tune last week, stressing that they don’t want to overtighten.

Inflation and rate decision

The show will kick off with the latest CPI inflation data on Tuesday. Forecasts suggest inflation cooled further in November, with the headline CPI rate projected to decline to 7.5%, from 7.7% in the previous month. It’s a similar story for the core number.

Business surveys add credence to these forecasts. The S&P Global services PMI revealed that companies raised their selling prices at the softest pace in two years, offering steep discounts to stimulate sales as demand weakened. Hence, inflation appears to be retrenching, something corroborated by persistent declines in used car prices and shipping costs.

The uncertainty revolves around rents, which account for one-third of the CPI index. Since rents follow trends in house prices but after several quarters, they’ve been heating up lately, playing catch-up with the surge in house prices last year. If this pattern persists, it could negate some of the improvement in other categories.

As for the Fed, the baseline scenario is for a 50bps rate increase on Wednesday, which the market currently assigns a 90% probability to. There’s also a 10% chance for a 75bps move, which is highly unlikely based on Fed communications but not impossible if the upcoming inflation numbers are shockingly hot.

Assuming no surprises on rates, investors will turn to the updated rate projections in the ‘dot plot’ and Chairman Powell’s press conference. Financial conditions have been loosening for two months now with the dollar and US yields retreating while stock markets rallied, which is counterproductive for Fed officials in their inflation battle.

A resolute tone by Powell or a dot plot that shows rates rising to 5%, higher than current market estimates of 4.9%, could breathe life back into the dollar. From a technical perspective, a pullback in euro/dollar could initially challenge the 1.0440 support region.

On the flipside, if the rate projections aren’t quite so high or if Powell adopts a softer tone, euro/dollar could extend its latest advance and spike above 1.0600.

Retail sales stats for November will follow on Thursday, providing insights into how consumption is holding up.

Neutral dollar? 

Overall, the outlook for the dollar seems neutral, as it is difficult to envision massive gains or massive losses from here. Some of the elements that fueled this rally seem to be losing their kick, with inflation powering down and the Fed adopting a softer profile, but the storm clouds gathering over foreign economies suggest it’s too early for a bearish reversal.

Most major economies are in worse shape than America. The Eurozone and the UK are likely to sink into recession sooner because they faced a severe energy shock in addition to rising rates, whereas China has its real estate crisis to deal with.

The dollar is unlikely to break down in such a gloomy global environment, thanks to its reserve currency status. Therefore, even though the two-year rally is probably on its final legs, the reversal might be a story for late next year.

Pound followers are preparing for an action-packed week ahead of the festive lull. With the Bank of England MPC meeting held on December 15, the market will be updated on the underlying economic trends that could be critical for the size of the expected rate move. Could the data releases tempt Bailey et al to announce a bigger rate hike and potentially boost the pound?

Weakness in economic data recently

Labour market, average earnings and inflation data releases set the scene for an exciting start to the week as the market is focused on the final gatherings of the major central banks for 2022. Naturally, central bankers attach extra importance to these data, especially the inflation prints, to avoid a potential policy mistake amidst a traditionally lower liquidity period. Since the November 3 meeting, when the MPC raised rates by 75bps, the UK data has been on the weak side. The upside surprise at the third quarter GDP was overshadowed by record-high inflation, as the October CPI print reached 11.1% year-on-year. Similarly, the PMIs showed some marginal improvement for November, but the October retail sales YoY remained firmly in negative territory, with hopes for a recovery pinned on the festive shop offers. Additionally, the weakness in the housing sector is becoming more widespread, as evident from the various house price indicators.

Busy data calendar, CPI stands out

On December 13, October average earnings excluding bonuses is forecast at 5.5% YoY while the October unemployment rate should print at 3.5%, remaining at record low levels. The following day, the November CPI is seen easing to 10.9% YoY with the core CPI expected to come at 6.5% YoY. These forecasts seem in line with the November inflation prints in other regions, providing a very small breathing space to central bankers globally. Nevertheless, Governor Bailey will be forced to write another letter to the Chancellor of the Exchequer detailing the reasons for the current high inflation rate and, particularly, the stickiness seen at the core CPI indicator.

Could the data tilt the BoE market pricing?

The MPC prepares for the December 15 meeting, a day after the Fed meeting. The current market pricing leaves a small window for surprises as the probability of a 50bps rate hike is 90%, with the remaining 10% pointing to another 75bps hike. In the meantime, the rhetoric from the various MPC members remains hawkish, but a particular comment from the Chief Economist Pill on November 30 stands out. He mentioned that inflation is expected to rapidly fall in the second half of 2023. This means that should inflation instead continue to surprise on the upside, the MPC could be ready to hike more aggressively than currently envisaged.

Will the pound react to the data releases?

It has been a one-way street since September 26 when pound/dollar printed 1.0325, a multi-decade low. Since then, the pound bulls have pushed the pair higher, recovering a good part of the 2022 depreciation of the pound against the dollar. The pair currently trades at the 1.2200 area. An upside surprise in the aforementioned data could push pound/dollar above the December high of 1.2344 towards the 1.2633-1.2750 area, where the May 5 high and the 61.8% Fibonacci retracement level of the June 1 – September 26 downtrend reside respectively. On the other hand, the pound bears would aim for the 200-day simple moving average at 1.2109, followed by the 38.2% Fibonacci level of 1.1824.