Next week, there are several events that could have significant implications for US market dynamics. CPI data will be released at the end of the week and is likely to fuel expectations around the Fed’s dovish pivot. Meanwhile, ongoing concerns about the coronavirus outbreak in China could lead to renewed selling pressure in CNY and other Chinese assets.
Events that will be influencing USD dynamics next week:
- Tuesday: US Consumer Confidence
- Wednesday: FOMC Member Powell’s Speech
- Thursday: ECB monetary policy meeting accounts
- Friday: US Employment Report
The global market has been subject to a series of extraordinary events recently. Between the announcement of additional stimulus packages, Brexit-related developments and now, increasing uncertainty surrounding the United States presidential election and upcoming U.S. CPI inflation data for November, it seems like every day brings a different kind of risk or volatility to the markets. These events will have both positive and negative implications for the market. On one hand, if successful stimulus plans are implemented, currencies may benefit from an increase in liquidity and investment activity in their respective regions. On the other hand, news items such as Brexit or a highly contested US election can lead to increased risk aversion and greater volatility in currency markets. As such, it appears that the FX market is likely to look for a balancing point until more concrete information on inflation is released ahead of the December FOMC meeting and more clarity emerges on how these various events will play out globally. The level at which this balance is achieved depends largely on how well-orchestrated central bank policies prove to be, as well as whether or not political leaders ultimately reach agreements among themselves. No matter what happens however, one thing remains certain – that this period of flux in the global economic landscape has created many opportunities for savvy investors to capitalize on during this unpredictable transition phase.
The ability to adjust quickly with any eventualities while staying alert to fast changing market conditions will likely be key ingredients in any successful strategy going forward into 2023. In uncertain times like these, merchants know that there’s still money to be made if they stay informed and remain flexible with their strategies – but trading with too much risk will also have its own set of complications should things not pan out as expected. It’s no easier today than ever before; investing success still requires finesse! Ultimately, it looks like November US CPI data and December FOMC meetings could play pivotal roles defining Q4 trends – keeping an eye on these key dates should prove essential for anyone wanting a handle on prevailing global markets moving forward!
Markets around the world were thrown into a state of flux this week as financial reports from China and the US raised new concerns about how global economies are faring. Reports of plateauing growth in China, combined with hawkish tones from Fed speakers, offered some support for the US dollar as investors looked to place safe bets. However, due to upcoming month-end flows, non-farm payroll data, and market positioning factors at play, the overall outlook for the US Dollar was still unclear. While a variety of economic factors could move the currency markets in either direction, these technical issues — specifically month-end flows — could have a particularly strong impact on USD movements. The mix of influencing news has left savvy traders wondering whether they should buy or sell their US Dollar holdings while they await their confidence levels to increase. Ultimately only time will tell which direction the greenback takes in the coming weeks and months ahead — only careful forecasting will reveal what kind of posture investors should take now. For any serious trader it is critical that they track all current events closely in order to make an informed decision about how best to proceed when trading USD.
The COVID-19 zero tolerance policy in China has created serious economic turmoil in the country and beyond. The Chinese economy was already struggling under the weight of a trade war with the US and weak economic growth, but the pandemic has added additional pressure in the form of restrictions on business activity and travel. As a result, fears of a deeper recession are weighing on the CNY and other Chinese assets, as investors watch to see how these new constraints will increase or decrease economic activity. The situation is particularly concerning in manufacturing cities, many of which have been hard hit by new restrictions. With production halted or slowed, companies may be forced to scale back development plans or even lay off staff, impeding potential output and dragging down demand for commodities from China. Although it is not yet clear how far reaching these effects will be, there is no doubt that tighter regulations will contribute to a further decline in equity values and an appreciation of U.S. dollars amongst investors seeking safety during this uncertain time. In light of these pressures, Chinese officials are scrambling to shore up their finances while developing strategies for mitigating the impacts of strict regulations so that their economy can recover as soon as possible. Only time will tell if successful efforts can stem the tide of falling assets in China requiring even greater dollar buying power. … Time will be our guide as we anticipate what happens next when investing with foresight into knowing what truly matters when global forces collide between two superpowers like never before over such unprecedented events! How will you capitalize from these opportunities? We’ll just have to wait and find out!
Investors will watch Federal Reserve Chairman Jerome Powell’s speech on Wednesday with keen interest, as they look for any signal that would suggest a hawkish stance when it comes to the Fed’s monetary policy. If Mr. Powell appears to strike a hawkish tone, then traders might take this as an indication of the central bank’s plans to aggressively raise borrowing costs after its December meeting. The possibility of such a move could result in a strengthening of the U.S. dollar and underline the greenback’s position as one of the most reliable safe-haven currencies in times of political and economic uncertainty. Speculations about what Mr. Powell may say have been rife over the past few days, and financial institutions around the world are taking notice, with many using his upcoming address as an opportunity to review their portfolios ahead of this week’s key event. Whatever happens during Powell’s speech Wednesday night, we can be sure that investors throughout the world will pay close attention to clues contained sound bites concerning any changes he may mention regarding terminal rate or hiking pace, potentially sending ripples across global markets in either direction depending on what signals are inferred. We view Mr. Powell’s address on Wednesday as an important moment for strong potential movements in USD going forward and await to see how markets respond later this week before acting accordingly going forward. One thing is certain – even if no definitive word is made from Powells mouth directly reacting to these questions – market participants will pore over every syllable he speaks with careful considerations towards his intonation and word choice until further guidance is provided from higher-ups at the FOMC. It promises to be an interesting end to what has already been a tumultuous year for global markets!
The US employment report, due to be released on Friday, could have a huge impact on the markets. If the report shows that job creation and wage increases are slowing down, it could give a strong signal to investors that the Fed is pivoting to a more dovish stance moving forward. Such an outlook would act as a drag on terminal rate pricing and provide an opening for other currencies to make gains against the dollar. That being said, strong job growth and robust wages could act as a boost for USD bulls. As such, Friday’s report will no doubt provide an insight into market sentiment in the days ahead. Interest rates will also play their part; if inflation continues to decline across various sectors, then this could also lead to further downward pressure on US Dollar rates over the coming weeks. In short, there are two sides to this story, which way it goes depends largely upon how well economic data from Friday’s jobs report turns out. All eyes will be focused upon the results of that much-anticipated release come Friday.
Growth
I forecast GDP growth to slow to 0.2% in 2022 (4Q/4Q) and to decline to -0.9% in 2023 (4Q/4Q) as the lagged effects of tighter monetary policy and financial conditions cool the economy.
Inflation
A recession next year and ongoing goods deflation should lead to disinflation next year. I expect headline PCE to grow 5.9% in 2022 (4Q/4Q) and 3.1% in 2023, and core to 4.9% and 3.1%, respectively. My forecast still puts inflation broadly in line with the Fed’s 2% mandate by the end of 2024.
Federal Reserve
I now anticipate 50bp rate hikes in December and February, followed by a 25bp rate hike in March, for a terminal rate of 5.0-5.25%. I think risks to our revised FOMC rate path continue to lie to the upside and upcoming prints on CPI inflation and the November employment report will weigh heavily on the near-term path for Fed policy.
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
- Tuesday: The release of US consumer confidence data could offer mixed implications for the FX market. stronger than expected data could support USD, while weaker than expected data could weigh on the dollar.
- Wednesday: FOMC Member Powell’s speech will be closely watched for any signal about terminal rate & hiking pace after December meeting; a hawkish tone could support USD, while a dovish tone could weigh on the dollar.
- Thursday: The release of ECB monetary policy meeting accounts could offer mixed implications for EUR. Stronger than expected data could support EUR, while weaker than expected data could weigh on EUR.
- Friday: The US employment report will be closely watched for any signs of slower job & wage growth; slower than expected job & wage growth could push down terminal rate pricing & dent broad USD.
Global Spotlight
Dec. 1 marks a meeting between U.S. President Joe Biden and French counterpart Emmanuel Macron in Washington D.C.. This get-together happens as France is urging the European Union to enforce stipends on technologies that are eco-friendly—something promoted by Biden’s Inflation Reduction Act, which has perks for electric vehicles assembled in America. The Biden administration perceives France as necessary in the U.S.’ efforts to get Europe to take a stronger stance against China and Russia, especially after German Chancellor Olaf Scholz’s highly critiqued visit to China early last month. Furthermore, it is speculated that Biden may try to improve relations with Macron after Australia scrapped an agreement to buy submarines from France in lieu of a deal with America and Britain–an act which caused much consternation in France.
In Taiwan, local elections will take place on Nov. 26 for 22 mayoral and county magistrate offices as well as city and county councils. According to the last date that polling was allowed in Taiwan (Nov. 16), it appears that the opposition and comparatively pro-China Kuomintang party will win a majority of the mayoral and magistrate elections. Three of Taiwan’s past four presidents were former mayors of Taipei, so a KMT win in the key mayoralty of Taipei would be a positive sign for their prospects in the January 2024 presidential elections. The Nov. 26 elections will also provide an early indicator of the relative strength of talent pools for the KMT and ruling Democratic Progressive Party ahead of the legislative elections in 2024.
On November 28th, Kazakh President Kassym-Jomart Tokayev will travel to Orenburg, Russia in order to participate in the Russia-Kazakhstan Interregional Cooperation Forum. The purpose of participation in this forum is to deepen economic cooperation between the two countries as well as for bilateral talks with Russian President Vladimir Putin. Tokayev will be meeting with Putin only two days after he begins his new presidential term, which shows Tokayev’s dedication to keeping strong personal ties with Putin. This is Tokayev’s way of countering the growing rhetoric from Moscow that suggests Kazakhstan isn’t aligned enough with Russia foreign policy-wise.
On Nov. 26, Prime Minister Shehbaz Sharif is predicted to name a new chief of army staff to take the place of Qamar Javed Bajwa in Pakistan’s army amid Imran Khan’s march. Given the military’s generally influential role in Pakistan’s foreign policy and domestic politics, though they claim to have reduced involvement as of late, the position is important. The recent appointment has caused a stir, especially with former Prime Minister Imran Khan’s claims that the military was partially to blame for his ouster earlier this year. On November 26th, Khan is planning to join forces with his supporters and resume the protest march to Islamabad–a city housing Pakistan’s army headquarters.
Stratfor.com
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Week’s Numbers
Review Last week’s numbers here.
Earnings
Aggregate Estimates and Revisions
- 22Q3 Y/Y earnings are expected to be 4.3%. Excluding the energy sector, the Y/Y earnings estimate is -3.5%.
- Of the 485 companies in the S&P 500 that have reported earnings to date for 22Q3, 70.7% have reported earnings above analyst estimates. This compares to a long-term average of 66.2% and prior four quarter average of 78.1%.
- During the week of Nov. 28, nine S&P 500 companies are expected to report quarterly earnings.
Source I/B/E/S data from Refinitiv
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