US: Fed to indicate earlier hikes and tapering
The US calendar sees the Federal Reserve FOMC meeting, retail sales and industrial production. Fed Chair Jerome Powell has telegraphed the “retirement” of the “transitory” description of inflation and raised the prospect of a swifter conclusion of QE. With no opposition raised by other Fed officials despite the uncertainty presented by the emergence of the Omicron variant, next week’s meeting look set to see the Fed announce an acceleration in QE tapering. We expect a $30bn reduction for January (to $60bn of purchases) and a further $30bn reduction in February with no further purchases in March onwards.
As for interest rates the Fed is likely to also indicate earlier action. As recently as March the FOMC dot plot of individual member forecasts suggested that interest rates were unlikely to increase until 2024. The June update moved this to 2023 and then in September the median expectation was for a 2022 move. Next week’s update from the Fed is set to show them shifting to a two-hike view for next year.
Bank of England to hold off on rate rise amid Omicron uncertainty
With the situation surrounding Omicron still highly uncertain, it looks more likely than not that the Bank of England will keep rates on hold again next week. But assuming the new variant doesn’t deliver a sharply hindered growth outlook, we think policymakers will increase rates in February. Bank officials have continued to voice concerns about inflation, and if anything Omicron could exacerbate this further via the impact on the supply chain recovery. A lot depends on the hit to January GDP – and if we see further restrictions come in, we could see the Bank delay yet further into 2022. Still, the direction of travel for the BoE is fairly clear. We expect two rate rises next year.
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Eurozone: PMIs to shed light on Omricon impact
Some signs of life from German industrial production in October will no doubt help the eurozone figure as well, but broad concerns about input shortages and transportation problems remain. So, while October might look reasonable, it doesn’t look like the sideways trend from recent months will end soon. More important perhaps is the December PMI, which will shed light on the impact of the 4th wave of the coronavirus on the economy. With some countries having introduced new restrictive measures, this is the one to look out for.
Concerns rotate around how the ongoing Omicron outbreak may affect such decisions and global economic growth. Meanwhile, the UK reported the first death related to the Omicron variant.
The EUR/USD pair trades a handful of pips below the 1.1300 level, while the British Pound fell against the greenback towards the 1.3200 region. Commodity-linked currencies came under selling pressure as Wall Street edged lower, recovering modestly ahead of the close. Safe-haven CHF and JPY are little changed against the dollar on a daily basis, trimming losses in the last trading session of the day.
The yield on the 10-year US Treasury note peaked at 1.50%, but retreated to 1.41%, finishing the day near the latter.
Global Equities
US shares closed on a record high on Friday following a huge inflation print in line with expecttions but, the largest in 40 odd years. Asian Markets continue to be held down by continued chineses regulatory pressure and the ongoing evergrande saga which saw the Nikkei slightly down while the hang seng posted 0.92% gain.
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Gold and Commodities
Gold managed to advance, with spot trading around $1,787 a troy ounce, while crude oil prices were weighed by the poor performance of equities, and WTI ended the day at $71.00 a barrel.
South African Markets
The Rand currently trading just above R16 to the US Dollar, while local equity markets are still looking positive as effects of the new strain are yet to filter in. One would magine the hospitality sector would be the most pertinent to keep an eye on. We ultimately see more dollar strength against the Rand however, this is largely being driven by a strong dollar and emerging market weakness in part attributable to other emerging nations the likes of Brazil and Turkey.
Cryptocurrencies
After last weeks drop which we believe might be profit taking coupled with external market factors and a stronger USD. Over the weekend BTC flirted with the $50000 mark again before rejecting and closing Monday around $46000. $40-$43k remains a critical support area this week and should we breach could open the door for further declines towards the $30000 range. Interesting Times, so please keep an eye on the website Crypto section for more updates moving forward.
SOURCES: ING
