Welcome to this holiday-shortened week with the secular Thanksgiving Celebration in the US this coming Thursday.
US markets will all be closed Thursday whilst the following day, Black Friday, will see the main equity markets close early at 1pm ET or 6pm UK time.
Review of last week’s key action
FTSE +67 +0.92% DOW Unchanged S&P -27 -0.7% NASDQ -177 -1.57% DAX +207 +1.46% NIKKEI -363 -1.285 Hang Seng +667 +3.85%
Global equity markets spent last week digesting the inflation reading from the previous week. What is clear is that investors want to be optimistic. Optimistic about US inflation, optimistic about China and a change to its zero-covid policy. And optimistic about energy prices, as natural gas has fallen up to 60% from its August peak when Putin cut off all supplies from Nort Stream 1.
The US inflation reading from November 10th still reverberates around the markets as investors expect the Federal Reserve to raise rates by less over the next three months. This has been the main driver for equities and a fall in the US dollar over the past 10 days.
The problem for the market is that whilst headline inflation will fall further from March 2023 onwards, it’s the core inflation reading that worries the Fed. US wages continue to rise and will pressure further the core inflation readings unless the Fed causes the economy to slow by a few notches.
Analysts expect that the Fed will need to raise rates to such an extent that a recession is likely. Only then will core inflation start to subside.
To underline this, last Thursday Fed member James Bullard warned that that interest rates have only a limited effect on observed inflation and that interest rates could rise to between 5% and 5.25% at least. Bullard and some other members may remain hawkish on rates despite the fall in inflation. The probability of 0.5% hike shifted slightly in favour of a 0.75% hike in December. This next meeting, December 14th, has still some time to run with much more data due out before then.
Last week’s move could be described as a consolidation of the recent gains since the inflation reading. The key question is about how sustainable this move is and whether the markets are reading the situation correctly and what the Fed may or may not do. Clearly Bullard’s comments are at odds with the recent market sentiment.
Data last week was mixed with a mixed report on the US manufacturing sector. Retail sales were better than consensus last Wednesday but had negligible effect as the S&P500 fell 0.7% on the week and the more sensitive NASDAQ fell 1.57%.
UK markets responded well to the much-trailed Autumn Statement last Thursday presented by the Chancellor Jeremy Hunt in Parliament. UK Gilt yields ticked up modestly to 3.24% from 3.15% but well below the level of 4.5% and higher following disastrous Truss/Kwarteng unfunded tax giveaway.
However, the gloom around the country and within the Tory grass roots means the Chancellor may still come under further pressure in the coming weeks.
EURUSD -0.28 -0.27% GBPUSD +0.55 +0.46 USDJPY +1.58 +1.13%
Like we have seen in equities last week, the US Dollar also paused following a more mixed picture for interest outlook. The comments made by Bullard have clearly caused the sell-off in the US Dollar to pause. There is unlikely much to be gleaned this week as to what Fed intentions are although minutes from the last FOMC meeting might help gauge the hawkish mood amongst the rate setting committee.
Gold -21 -1.19% UK OIL -8.08 -8.42% US OIL -8.78 -9.87% Bitcoin unchanged
Gold reacted in typical fashion last week as the US Dollar paused after losing a lot of ground the previous week. Oil market’s mood darkened last as the effects of a slowing global economy takes its toll on the demand projections, despite the threat that Russian oil supplies will fall when these EU sanctions on Russian crude come into force.
Crypto assets were in shock last week following the demise of the FTX Exchange platform. The world’s largest Crypto fund has inevitably become embroiled in the saga as investors’ appetite for Crypto assets wanes. The $10.5bn Grayscale Bitcoin Trust, which owns 3.5% of the world’s bitcoin supply, has collapsed by 83% since November last year. The trust’s assets are priced at a 39% discount to the value of its underlying assets, which underlines the complete lack of confidence investors currently have in the sector.
Data / events for the week ahead
A shortened holiday week due to Thanksgiving. All US markets will be closed Thursday whilst those opening on Black Friday will close early at 6pm UK time. Data this week is quite thin on the ground with the mid-week Manufacturing and Services PMI the standout release.
Monday
No kay data releases
Tuesday
Australia - Governor Lowe from the RBA speaking in Melbourne about "Price Stability, the Supply Side, and Prosperity". Tough message I suspect.
US - A plethora of Fed officials speaking. The most important being Mester at an online event in Cleveland.
Wednesday
New Zealand - Reserve Bank of New Zealand interest rate decision. An increase of 0.75% expected. NZD sensitive.
UK, EU and US - Manufacturing and Services PMI data. This data remains under pressure with almost all economies now seeing continued contraction in both manufacturing and services sector. Some stability returning to the US manufacturing sector but too early for much optimism. Equities, Bonds, and major FX pairs sensitive to this data.
US - Core Durable Good orders. Still under pressure with slight recovery in a declining set of data.
US - Revised University of Michigan Consumer Sentiment. Improving gradually. USD & equities sensitive.
US - FOMC minutes from last meeting held on November 2nd. Insightful but recent inflation data might just change some of the argument. US Equities, USD, and global markets sensitive.
Thursday
US - Thanksgiving Day. All US markets closed. Expect reduced activity across most international markets with lighter volumes that can result exaggerated moves.
Friday
US - Black Friday. US Equity markets close at 6pm (UK time) whilst some US commodity markets remain closed.
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