The markets are preparing for an eventful week, with a focus on interest rate hikes in Europe and the United States, as well as important job and wage data from the US, which will give investors a better understanding of the state of inflation.
Market analysts expect the Federal Reserve to increase rates by 25 basis points on Wednesday, followed by half-point hikes from the European Central Bank and the Bank of England the next day. Any deviation from this prediction would be considered a major shock.
At the start of the week, Europe’s benchmark STOXX index fell by 0.5%, reflecting a similar dip in the MSCI index of Asia-Pacific shares outside Japan. However, the index has still risen 11% in January due to China’s reopening, which has positively impacted the country’s economy. In the US, futures for the S&P 500 and Nasdaq were down nearly 1%, as investors await guidance from the Federal Reserve’s policy meeting later in the week.
Analysts expect the Fed to have a hawkish tone, suggesting that more action is needed to control inflation. Despite tight labor markets, elevated core inflation, and easier financial conditions, JPMorgan’s chief economist Bruce Kasman predicts that Fed Chair Powell will stress that the 25 basis point increase does not signal a pause in the tightening process, and will also push back against market predictions of rate cuts later in the year.
Impact of Feds decisions on global market
Despite the Fed’s tough stance on tightening, financial conditions have been easing, causing yields on 10-year notes to fall 33 basis points this month to 3.50%. This dovish outlook will be tested by the release of US payrolls, employment cost index, and ISM surveys. In Europe, the reading on EU inflation will be key in determining the ECB’s next move, including the possibility of a half-point rate rise in March or a slowdown in the pace of tightening.
The US dollar has faced challenges this month, losing 1.6% against a basket of major currencies as market predictions of early Fed easing have impacted its value. The euro, on the other hand, has risen 1.5% for January, and the dollar has even fallen 1.3% against the yen despite the Bank of Japan’s commitment to its ultra-easy policies. The drop in the dollar and yields has been beneficial for gold, which is up 5.8% this month to $1,930 per ounce.
The oil market remains cautious, with Brent down nearly 1% to $85.88 per barrel, due to concerns that the expected Fed rate hikes may negatively impact fuel demand. China’s rapid reopening is seen as a positive for commodities in general, with copper, iron ore, and oil prices all benefiting.
