Last week’s hawkish twist by Fed Chair Powell and the spreading new Covid variant, Omicron, will continue to exert uncertainty on the global economy. Both the growth and inflation outlook are set to be impacted, though severe social restrictions that could more forcefully derail activity are not being priced into markets just yet.
We may see more dizzying swings in global stock markets, underscoring how investors are trying to navigate an increasingly cloudy global outlook. Last Wednesday, the benchmark S&P500 US stock index recorded its biggest intraday swing in price since March, with the gauge suffering its worst two weeks of losses in more than a year. This volatility has also been rising in Europe too with a well-watched measure in 50 European blue-chip stocks hitting its highest level in a year.
With the VIX indicator closing above 30 last week, we should expect more whipsaws in the near term. The challenging trading conditions at this time of year, with lower volumes and trading desks winding down risk positions, may exacerbate whippy price action.
US CPI to inform on Fed’s next policy move
The main focus on the data front will be the US CPI for November. As the Fed’s Powell acknowledged last week, inflation is looking less “transitory” than originally expected and Friday’s consumer price data should give the world’s most important central bank further evidence to see if faster policy tightening is warranted.
The headline reading is set to rise 0.7% m/m with the core at 0.5%. This will likely take the annual reading close to 7% and the core above 5%. Notable increases in energy, housing and second-hand car prices are expected. Last month’s data had risen at the fastest pace in three decades and the persistent elevated prints should push the Fed into faster action and be supportive of the US Dollar.
The DXY Index posted a weekly “doji” candle signifying obvious indecision, which is entirely understandable amid all the current uncertainty. Last week’s low at 95.51 should offer initial support while bulls will target 96.64 ahead of the recent high at 96.93. Falling US bond yields will be worth watching as they point to major concerns among investors about the growth outlook going forward.
We do get two G-10 central bank meetings this week, though policy settings are set to remain unchanged at both the RBA and the Bank of Canada. The current direction of travel will be of interest to traders, and whether the Omicron variant will impact the medium-term policy view.
CNH: China trade data
JPY: Japan cash earnings, household spending, leading index
AUD: Reserve Bank of Australia policy decision, consumer confidence
EUR: Eurozone GDP, Germany ZEW survey expectations, industrial production
USD: U.S trade data
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