This week Federal Reserve Chair Jerome Powell came out and said what the market had been thinking. He signaled that the US Federal Reserve could slow the rate at which it raises interest rates. The market is now fully pricing in a 50 basis point rate hike in December. Powell also said that interest rates were likely to rise higher than forecast just two months ago, although the market looked past the prospect of a higher terminal rate.
Powell’s comments, along with cooling core PCE, which slowed to 5% YoY in November and weaker than forecast manufacturing ISM PMI all support the view that the Fed can start to slow rate hikes. Meanwhile, stronger than forecast GDP and jobless claims data (non-farm payrolls are yet to be released) showed a more resilient economy.
In addition to the US economy and the Fed, the other big focus has been China. Rapidly spreading Covid and lockdown restrictions prompted widespread protests. However, this was quickly replaced with optimism that zero-Covid restrictions would soon ease as curbs were lifted. Developments in China will remain in focus next week as they are crucial to the ongoing recovery of global supply chains.
Indices
Global indices have benefitted from the risk-on mood in the market. TheDow Jones rallied into a bull market, rising 20% from its 2022 September low. The Nasdaq jumped 5% across the week, and the S&P500 crossed above its 200 DMA, a key technical level that, if sustained, could be considered a bullish signal.
In Europe, the DAX benefited from signs that inflation is cooling in the eurozone, raising the chances of the ECB slowing its pace of rate hikes. Optimism surrounding China and the Fed also lifted stocks. The DAX trades at an 8-month high, just below 14500.
Forex
The USD tumbled across the week; in fact, the USD experienced its worst monthly decline since 2010. The less hawkish Fed pulled the greenback 1.2% lower this week, the second straight week of declines.
USD/JPY fell to a 3.5-month low of 136.00 as the BoJ-Fed divergence narrowed. While the Fed is adopting a less hawkish stance, the BoJ’s board member Noguchi adopted a less dovish stance.
GBP/USD has been a clear outperformer, with the pound benefitting from USD outflows. The pound not only rose 1.4% this week against the USD but also rose strongly against all major peers.
BTC/USD
After three straight weeks of declines, Bitcoin has posted modest gains across the week as it continues to recover from 15.5k, the two-year low hit on November 20th. While there has been further fallout from the FTX collapse, with BlockFi filing for chapter 11 bankruptcy, cryptocurrencies are starting to show a level of resilience to the ongoing contagion. On a more positive note, Brazil passed a bill legalizing Bitcoin as a form of payment. This is not quite the same as El Salvador, where Bitcoin was made legal tender, but it’s the next best thing. The macro backdrop supported risk assets such as Bitcoin, which has helped the recovery.
Oil
Oil prices have experienced high levels of volatility this week, falling to a 2022 low before rebounding sharply. Oil is set to end the week up around 7% after three straight weeks of declines. The Covid picture in China has been a principal driver of oil, initially sending the commodity to a low of $73.10 before optimism surrounding re-opening has helped to drive the price back over $80.00. There are, of course, other drivers, such as the weaker USD and supply-side concerns. EIA data this week showed a 7.5 million barrel draw on inventories, significantly higher than expected. Finally, nerves surrounding next week’s OPEC meeting, the Russian oil ban, and the G7 price cap are also lifting the price.
What to watch for the coming week:
The Santa rally may have started early, but can it continue across the coming week? Here we look at the key events to be watching.
OPEC meeting - 4th December
OPEC+ is due to meet on December 4th to discuss oil production quotas after slashing output by 2 million bpd in October’s meeting. The December meeting comes after a volatile few weeks for oil and amid rising speculation as to what the oil cartel could agree. Rumours at the start of the week that OPEC+ would increase production were quickly denied. The Sunday meeting has been changed into a virtual meeting which could hint that no changes to production levels are expected. The G7 oil price cap and EU Russian oil ban are also coming into effect early next week; OPEC could prefer to wait and see the impact of these measures on oil prices before making their next move.
RBA rate decision - 6th December
Australian inflation cooled by more than forecast to 6.9% YoY in November, down from 7.3%YoY in October, boosting hopes that inflation may have peaked. Cooling inflation supports the RBA’s decision to move to smaller rate hikes of 25 basis points. Another 25-basis point hike is widely expected in the December meeting as the fight against inflation continues. Still, the central bank acknowledges the lag time for rate hikes to hit the economy. Investors will be watching to see what the RBA has planned for the path of future hikes and if a pause in rate hikes could be in store for Q1 2023.
BoC rate decision -7th December
The BoC hikes rates by 50 basis points in the October meeting, taking the overnight cash rate (OCR) to 3.75%. This is the highest OCR level since January 2008, when it was 4%. While the jobs market remained strong in October, inflation has shown signs of cooling in recent months. However, BoC Governor Tiff Macklem said that there is more work to be done for price rises to slow more broadly. In other words, he believes more rate hikes are needed. A 25-basis point hike is widely expected. However, a 50 basis point hike can’t be totally discounted.
US PPI - 8th December
US PPI, which measures inflation at the factory gate level, fell by more than expected in October to 8% YoY. PPI continued to extend a fall away from the 11.7% high in March. The downward trend will likely continue as inflationary pressures ease due to improving supply chains. PPI is often considered a lead indicator for CPI, so a decline in the index can fuel less hawkish Fed bets.
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