- Markets price in a 5.7% Consumer Price Index (CPI) reading, with the Nov 2022 reading at 6.5%
- Fed signals rates are nearing a ‘sufficiently high level’
- 17 of 19 Fed officials project rates to be north of 5% by end of 2023; no cuts forecasted this year
- Non-Farm payrolls exceed expectations at 223K vs a 175-215K forecast
- Market saw a rally in equities thinking the Fed may stall the aggressive rate hikes; dollars sold off ~2%
Data and Events this Week
Monday – EU Gross Domestic Product (GDP), EU Unemployment Rate, EU Consumer Price Index (CPI)
Thursday – US CPI data, US Mortgage Applications, US Initial Jobless Claims, CHN Trade Balance Update, CAN Existing Home Sales
Last Week's Range
EUR/USD 1.05-1.07 GBP/USD 1.18-1.21 USD/CAD 1.34-1.37 AUD/USD 0.67-0.69 USD/JPY 129.5-134.8 USD/CNH 6.82-6.94 USD/ILS 3.44-3.56 USD/MXN 19.1-19.5 USD/CHF 0.92-0.94 USD/INR 82.5-82.9 USD/BRL 5.22-5.48 USD/SGD 1.33-1.35 USD/DKK 6.96-7.09 USD/SEK 10.4-10.8 USD/NOK 9.8-10.3
Market Bias : Bearish
- 2022 focus was on inflation and central bank tightening, but 2023 attention may shift to macro liquidity; recession fears may become more realized if rate hikes dampen economic activities.
- Non-Farm Payrolls beat forecast by at 235k vs 175 – 215K, but wages did not follow this pattern as sharply, reducing this factor as a contributor to the rate hiking conversation
- Employment report shows slowdown in wages, this along with softer than expected Purchasing Managers' Index (PMI) causing equities to rally, USD selloff as investors try to take advantage of suppressed equity markets in hopes that the fed reduces its rate hike pattern
- Fed minutes communicate more hikes on the horizon, but fast approaching a terminal rate
- Bloomberg Economics forecasts CPI headline print to show deflation, and the monthly pace of core CPI to annualize near Fed’s 2% price target, supporting a halt in rate hikes, and furthering a USD selloff
- PMI showed a contraction at 48.4 (anything below 50 is a contraction of orders), which may be a contributing sign towards the beginning of a recession
Market Bias : Mixed
- The Bank of England (BOE) says business leaders see inflation accelerating in years ahead, in addition to wage growth strengthening, adding to concerns about upward pressures on prices.
- Businesses expect higher interest rates leading to lower investment and employment in the next year
- A fourth monthly decline in the UK house price index shows that the housing correction rumbled on through December. Annual price gains have continued to decelerate sharply to 2.8% from 4.4% in November. UK house prices on track to drop 8% this year.
Market Bias : Mixed
- Euro facing challenges long term; inflation data driving rate hikes causing the likelihood of an economic hard landing to increase
- Recent 50bps rate hike to tame inflation seen as just the beginning
- European Central Bank (ECB) to further tighten policy by kicking off balance sheet reduction in March (Quantitative tightening)
Market Bias : Mixed
- Canadian jobs blew out expectations at +104k vs forecast of +5k
- Full time employment grew, leading the unemployment rate lower to 5.0% from 5.2%
- Given the sensitive economic implications of hiking rates too fast, the consensus is to expect a hike around 0-25bps, with +19 being priced in
Market Bias : Bullish
- January tends to be a bullish market for CNH vs USD as conversions take place from USD into yuan three weeks before Lunar New Year to pay for bonuses before workers leave factories for the holiday
- Strong equity market in Hong Kong providing some of the best returns and outperforming mainland China. This should support a boost in CNH as investors buy onshore stocks in hopes of taking advantage of underperforming opportunities.
- The government is looking to reopen the HK and China border check points as well as evaluating various ways to boost growth, most specifically in the real estate sector
Market Bias : Bullish
Performance relative to USD:
- A weaker shekel is thought to fuel inflation; Israel joining Japan in trying to manage its currency higher in order to fight inflation
- Even in the face of a likely recession, Israel is committed to combating inflation with a more expensive currency – this could push Israel into a recession sooner rather than later
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