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(Reuters) – Inflation is at the center: Markets will look to the US Federal Reserve when and how much it can tighten its policy to deal with inflation in the 40-year high, whether CPI data force Australia to recognize the need for an earlier rate. increases, and what PMIs say about the spiral of costs in the services sector.
Earnings also show pressure on companies ’wage costs. And finally, politics will complicate the picture in the framework of Russia, Ukraine and Italy.
Here’s your week at the following markets: Ira Iosebashvili @IraIosebashvili from New York, Kevin Buckland from Tokyo, Dhara Ranasinghe @DharaRanasinghe, Julien Ponthus @JulienReuters and Sujata Rao @reutersSujataR London.
1 / TO INCREASE THE PRELIMINARY ACCOUNT
If the markets are doing well, the Fed will hold a January 25-26 meeting before raising interest rates.
They are priced at roughly four rate hikes this year, starting in March, but aside from rate hikes, markets will hear what the Fed has to say about the $ 8 trillion balance sheet.
The minutes of the December meeting showed lengthy discussions about reducing bond holdings. Faith President Jerome Powell said the balance sheet could shrink faster than in the past.
A Reuters poll has shown that the Fed will begin cutting its balance sheet by the end of September, although some may think it could happen sooner and faster. Hawkish signals could extend Treasury and technology stock sales.
Meanwhile, the Bank of Canada is not waiting for its neighbor and may begin raising rates on Wednesday.
GRAPH: FED AND YIELDS, https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwjebzpo/Pasted%20image%201642526443746.png 2 / DECISIONS: ATTENTION ATLANTIC GAP!
Could 2022 be the year in which European stocks break the six-year low performance against their US counterparts?
On the old continent there is an army of cyclical and valuable stocks like banks, which usually outperform technology in times of hardship. With Wall Street lagging behind European markets this year, that dynamic already seems to be at stake.
The quarterly profit season provides a boost for European bulls; Refinitiv I / B / E / S data show that profits grew by 49% year-on-year. Richemont and Burberry luxury groups surprised the market with quarterly updates. European gains are also less threatened by wage inflation, Barclays (LON 🙂 analysts have warned.
US profits are expected to grow by 23%, and markets are still accepting Goldman Sachs (NYSE:) ‘s profit failure and high costs.
In the coming days, LVMH, STMicro and Philips are among the European names that are reporting and IBM (NYSE :), Verizon (NYSE 🙂 and Apple (NASDAQ 🙂 in the US.
GRAPH: Wage Growth, https://fingfx.thomsonreuters.com/gfx/mkt/znpnelgjbvl/Pasted%20image%201642600245725.png GRAPH: STOXX vs. S&P Earnings Forecast, https: //fom / earn 20theme.PNG 3 / NERO: NEW PRESIDENT OF ITALY
Italy needs a new president and a complex process to replace Sergio Mattarella will begin on Monday with Prime Minister Mario Draghi in office.
It could lead to weeks of political instability for Italy. If Draghi gets the job, a new prime minister will have to be found and a multi-party coalition that supports his government could be disbanded. The same thing can happen if the parties do not agree on an alternative candidate.
All this as the seriousness of the bond market grows, as inflation rises and the ECB responds more aggressively. The gathering of Russian troops near the Ukrainian border raises fears of war, as geopolitical developments in general will continue to gain market attention. GRAPHIC: Italy needs new president, https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnjejgpq/Italytheme2001.PNG
4 / DOWN RATES?
The Fed is not the only central bank that has underestimated inflation. Australian CPI data on Tuesday may force Australian Reserve Bank Governor Philip Lowe to capitulate to a long-held view that rate hikes this year are “very difficult”.
Money markets have long questioned the Lowe’s (NYSE 🙂 scenario, and as soon as May they are putting up their first quarter-percent rise with at least an additional three-quarter points by the end of the year.
Australia’s unemployment rate has fallen to its lowest level since 2008, with some economists predicting core inflation to rise above 2009 by 2.5%. At the very least, that reading should seal the end of pandemic-era bond purchases at the Feb. 1 RBA meeting. GRAPH: RBA inflation test, https://fingfx.thomsonreuters.com/gfx/mkt/xmvjobdjepr/Pasted%20image%201642685575045.png
5 / COSTS OF SERVICE
Considering Omicron’s expansion, global business activity held up remarkably well in December, as shown by the Purchasing Managers ’Index (PMI). But when the January PMI comes forward on Monday, attention will be paid to how cost pressures arise.
Compound input prices fell last month as factory supply chain delays eased, but U.S. service sector input prices rose to a record high since 2009. They stayed close to the November records in Europe, and rose in China for the 18th consecutive month.
In countries where services affect the lion’s share of economic output, rising costs add more uncertainty to inflation forecasts. GRAPH: Admission costs, https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwjbyovo/Pasted%20image%201642626686730.png
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