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It’s a veritable feast of central bank meetings and top tier economic data this week which will close out another volatile year. Within the space of just over forty-eight hours, markets will be treated to UK jobs, UK and US CPI data, the Fed meeting plus the SNB, Norges Bank, ECB and Bank of England rate decisions.
The spotlight will inevitably be on Wednesday’s Federal Open Market Committee (FOMC). Money markets are pricing in a 50bp rate hike after four straight 75bp moves. Much focus will centre on the updated dot plot of economic projections. This is expected to show a higher terminal rate around 5%, up from the September forecast of 4.60%. Any guidance from Chair Powell will direct markets. “More work to do” or rates being held at peak for “some time” will be hawkish and potentially hurt stocks and gold.
The dollar has been languishing near its cycle lows recently with the upside capped at the 200-day simple day moving average at 105.74. A second consecutive low print in the latest US core CPI number released on Tuesday would help the long-standing “pivot” narrative and probably push the DXY to new lows. Watch out for one of the Fed’s media mouthpieces like the WSJ if that data deviates widely versus expectations.
A busy week in Europe sees several central banks release their latest rate decisions on Thursday. Market consensus is for 50bp rate increases from the ECB and Bank of England. It seems too early for the ECB to slow down the pace of rate hikes even though recent headline inflation data fell below expectations. A hawkish sounding President Lagarde who appears defiant in fighting core inflation could push the euro to new cycle highs above 1.06.
The Bank of England is widely expected to raise rates by 50bps after its one-off jumbo-sized 75bp move at its last meeting. The decision on rates may not be unanimous with some MPC watchers predicting a four-way voting split ie. unchanged, 25bp, 50bp and 75bp rate hikes. Markets are pricing in a peak rate at 4.5% so the barrage of economic data could also move GBP. The 1.23 area looks to be a near-term resistance barrier in cable. Much will also depend on how hawkish the Fed is, the day before the BoE.
Major risk events of the week
13 December 2022, Tuesday:
–UK Jobs: The October unemployment rate is forecast to tick up one-tenth to 3.7%. Vacancies fell for a fifth report in a row as employers worried about the outlook for the economy. But pay growth is seen remaining strong in the near term.
-US CPI: Consensus expect November headline inflation to soften to 7.3% y/y and 0.3% m/m from 7.7% and 0.4%. That was the first time the annual number had fallen below 8% since February. The core print is seen falling to 6.1% y/y from 6.3% with the monthly reading unchanged at 0.3%.
14 December 2022, Wednesday:
– UK CPI: Expectations are for a headline annual print of 10.9%, falling from 11.1% in October. Surging household energy bills and food prices pushed inflation to a 41-year high. Most economists think price pressures have probably peaked with the scale of fiscal tightening helping bring inflation down.
-FOMC Meeting: Markets are expecting a smaller 50bp rate which would take the target rate to 4.25%-4.5%. This would mean cumulative tightening of 375bps since March. Most analysts think the overall tone and Chair Powell’s language in the press conference will be relatively hawkish, pushing back against the recent easing in financial conditions.
15 December 2022, Thursday:
-Bank of England Meeting: The MPC is set to hike rates for a ninth time in a row, with a 50bp almost fully priced in. There is no new MPR or press conference. Higher than expected inflation in October is expected to have peaked, though recent data has been solid with wage growth staying strong.
-ECB Meeting: Money markets price in around a 75% chance of 50bp rate increase, taking the main refinancing rate to 2.5%. Resilient third quarter data has softened into year-end and inflation has also cooled. But prices remain elevated with the bank worried about fiscal stimulus extending inflationary pressures.
-US Retail Sales: The market median estimates a flat reading in November from the prior 1.3% rise. Households stepped up purchases of cars and a range of other goods, indicating consumer spending picked up early in the fourth quarter. Higher interest rates may weigh on activity going forward.
16 December 2022, Friday:
– Eurozone PMIs: The data is a gauge for how the region’s economy is faring at the end of the fourth quarter. Analysts expect the surveys to continue signalling a contraction (sub-50 prints) with broad-based weakening in demand starting to take hold.