Wall Street remains stable before inflation data, Fed action

Summary

  • Wall Street stocks tick up
  • Treasury yields flat, dollar eases
  • Oil regains some ground
  • U.S. CPI on Tuesday, Fed meeting on Wednesday
  • ECB, BOE rate decisions on Thursday

Investors were waiting for the final round of transatlantic central bank interest rate hikes this year, expecting that the now-heavy pace of increases in borrowing costs would finally slow. Global markets, U.S. Treasury yields, and the currency were all stable on Monday.

Early trading in U.S. stocks showed a little increase, signalling a cautious start on Wall Street. The S&P 500 (.SPX) increased by 0.27%, the Nasdaq Composite (.IXIC) by 0.07%, and the Dow Jones Industrial Average (.DJI) increased by 0.55%.

Following a multi-week slump, oil prices rose as a faltering global economy counterbalanced tighter supplies caused by the suspension of a crucial pipeline feeding the United States and Russian production cut threats.

The dollar fell as statistics released last week revealed that wholesale inflation in the United States increased more than anticipated in November, supporting the idea that the Federal Reserve may need to maintain higher interest rates for longer.

On Tuesday, the United States will release its consumer price index for November, which is expected to show a slowing in core annual inflation.

According to ING bank, “a high event risk calendar this week stands to establish the major issues for 2023.”

According to ING, the market consensus continues to “underappreciate” the risk of inflation lingering higher for a longer period of time and “dangerously second-guesses” the Fed’s decision to decrease interest rates in the second half of next year.

The benchmark MSCI all country stock index (.MIWD00000PUS), which has lost about 18% this year, was down 0.16%, wiping out all gains made in 2021.

As investors anticipated changes in interest rates, the 600-company STOXX index (.STOXX) in Europe was down roughly 0.7%.

The MSCI’s broadest index of Asia-Pacific shares outside of Japan (.MIAPJ0000PUS) fell 1.3% in Asia, wiping out nearly all of the gains made the previous week on hopes that China’s economy would finally open up after its zero-COVID policy was abandoned. The Nikkei 225 in Japan decreased by 0.2%.

WATCH THE CENTRAL BANK
In contrast to the 75 basis point increases seen in recent meetings, economists anticipate that the Federal Reserve, the European Central Bank, and the Bank of England will all raise interest rates by 50 basis points on Wednesday and Thursday, respectively.

Central banks will start acting less aggressively this week, according to Patrick Spencer, vice chair of equity at Baird Investment Bank, though Tuesday’s CPI data will be crucial.

“It’s the last significant week of the year; there won’t be any real catalysts after this week. We’re off to the races and we’ll have our year-end rally if the CPI is a muted number “stated Spencer.

Nevertheless, Spencer noted that deflationary pressures are growing regardless of the CPI due to falling prices for iron ore, lumber, and houses as well as falling crude oil prices for the year.

“All this talk of a recession, in my opinion, is manifested in markets and price movements. Employment generally is the key to a recovery from a recession, and I believe it will be stronger than most people anticipate “stated Spencer.

At the Fed’s final meeting of 2022 on Wednesday, rates are expected to rise by 50 basis points, but attention will also be paid to the central bank’s revised economic forecasts and Fed Chair Jerome Powell’s press conference.

“The Fed and CPI are likely to be the main topics of discussion this week. That is outdated news to us “Market analysts at Morgan Stanley stated in a note on Monday.

While year-end trading ranges are important, the final chapter of this bear market is all about the trajectory of earnings estimates, which are, in our opinion, much too high.

USD, BOND EASE
The dollar declined on currency exchanges by 0.124% to $104.93, but it was still close to the five-month low of $104.1 reached a week ago. On Monday, the euro increased 0.12% to $1.0544.

On Monday, Treasury yields remained largely unchanged. The 10-year Treasury note yield increased by 0.2 basis points to 3.569%, while the 30-year bond yield was essentially unchanged at 3.55%. The typical indicator of interest rate expectations, the two-year yield, increased just 1.4 basis points to 4.342%.

U.S. crude increased by 3.77% to $73.70 per barrel, and Brent was up 2.92% for the day at $78.32 per barrel.

On Monday, gold prices slightly declined. Gold’s spot price fell 0.7% to $1,783.99 per ounce. American gold futures decreased 0.52% to $1,788.70 per ounce.

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