Australia’s resilient labor market increases the likelihood of an aggressive rate hike

By JustMarkets

Yesterday, the US Department of Commerce announced that Retail Sales in October rose by 1.3% (1.0% expected). Stronger than expected US Retail Sales overshadowed the inflation outlook and hope that the Federal Reserve will scale back its aggressive rate hike. As the stock market closed yesterday, the Dow Jones Index (US30) decreased by 0.12%, and the S&P 500 Index (US500) lost 0.83%. The NASDAQ Technology Index (US100) fell by 1.54%.

San Francisco Fed President Mary Daly told CNBC that it is prudent for the Fed to raise the interest rate to the 4.75-5.25% range (the current level is 4.00%) by early next year and that pausing rate hikes is not part of the discussion. Money markets currently estimate a 93% chance that the Fed will decrease a step rate hike to 0.5% at its December 14 meeting and only a 7% chance of a 75 basis point hike. Goldman Sachs added another 25 basis point Fed hike to its forecast for 2023 and raised its forecast for the peak federal funds rate to 5.0-5.25%. According to GS analysts, policymakers will have to counter any premature easing because of high and persistent inflation.

Equity markets in Europe traded lower yesterday. Germany’s DAX (DE30) decreased by 1.00%, France’s CAC 40 (FR40) was down by 0.52%, Spain’s IBEX 35 (ES35) lost 1.06%, Britain’s FTSE 100 (UK100) closed down by 0.25% on Wednesday.

The European Central Bank (ECB) is likely to raise interest rates again in December to combat rising inflation, said Governing Council spokesman François Villeroy de Galhau. But two key ECB policymakers said Wednesday that while the European Central Bank should continue to raise interest rates, there are growing reasons for increased caution in tightening policy after a series of aggressive moves. Analysts forecast a 0.5% rate hike at the ECB’s next meeting.

Today, the inflation data will be published in Europe. Experts believe that the base Consumer Prices (excluding food and fuel prices) in Europe will reach a new record.

The UK Treasury Secretary Jeremy Hunt will unveil the government’s new budget on Thursday, which is likely to cut government spending and raise taxes. According to analysts, the UK is already in recession, with record inflation at 11%. A return to austerity would hurt millions of households and exacerbate the expected recession. But it would help slow borrowing costs, lower inflation, and restore investor confidence.

The European Commission called on the EU Council to include Bulgaria, Romania, and Croatia in the Schengen Agreement, as the countries effectively met all the conditions for joining the visa-free area. The EC believes that expanding the list of Schengen countries will make Europe safer through enhanced protection of common external borders and effective law enforcement cooperation.

Demand for gold as a safe haven has recently declined as fears of an escalating war in Ukraine subsided, while copper prices continued to fall on fears of a COVID-19 outbreak in China. Geopolitical fears in Europe eased slightly after Poland and NATO said Wednesday that Tuesday’s explosion, which killed two people in Poland, was probably caused by part of a Ukrainian air defense system missile and not a deliberate Russian strike. But Ukraine is asking for its representatives to be allowed into the investigation since the fragments of the rocket do not leave a hole with a depth of 5 meters.

Oil prices declined for the second day in a row as concerns over geopolitical tensions eased and rising COVID-19 cases in China increased fears over demand from the world’s largest oil importer. Crude inventories in the United States, the world’s largest oil consumer, fell by 5.4 million barrels over the week.

Asian markets traded flat yesterday. Japan’s Nikkei 225 (JP225) gained 0.14%, Hong Kong’s Hang Seng (HK50) decreased by 0.47%, and Australia’s S&P/ASX 200 (AU200) ended the day down by 0.27%.

Japan’s imports more than halved year-on-year in October, eclipsing the growth in exports and widening the trade deficit. Thus, the trade deficit exacerbates the problems faced by households struggling to make ends meet as import prices rise. Businesses that depend on imports are also facing problems, so they are shifting risk and rising prices to customers.

Minutes from the November policy meeting of Australia’s central bank showed that the RBA is ready to either pause or return to a larger rate hike “if the economy demands it.” Australia’s unemployment rate fell from 3.5% to 3.4%, indicating that the RBA has room to maneuver as the labor market remains resilient.

S&P 500 (F) (US500) 3,958.79 −32.94 (−0.83%)

Dow Jones (US30) 33,553.83 −39.09 (−0.12%)

DAX (DE40) 14,234.03 −144.48 (−1.00%)

FTSE 100 (UK100) 7,351.19 −18.25 (−0.25%)

USD Index 106.31 −0.10 (−0.09%)

• – Australia Unemployment Rate (m/m) at 02:30 (GMT+2);
• – Eurozone Consumer Price Index (m/m) at 12:00 (GMT+2);
• – US FOMC Member Bullard Speaks at 15:00 (GMT+2);
• – US Building Permits (m/m) at 15:30 (GMT+2);
• – US Initial Jobless Claims (w/w) at 15:30 (GMT+2);
• – US Philadelphia Fed Manufacturing Index (m/m) at 15:30 (GMT+2);
• – US FOMC Member Bowman Speaks at 16:15 (GMT+2);
• – US FOMC Member Mester Speaks at 16:40 (GMT+2);
• – US Natural Gas Storage (w/w) at 17:30 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.