The US Fed is likely to reduce the pace of rate hikes. The ECB remains on an aggressive path

January 16, 2023

The Dow Jones Index (US30) increased by 0.40% (+1.90% for the week), and the S&P 500 Index (US500) added 0.40% (+2.26% for the week) at the close of the stock market on Friday. The Technology Index NASDAQ (US100) gained 0.71% on Friday (+3.91% for the week). All three indices closed in positive territory on last week’s results.

The University of Michigan consumer survey on Friday showed that Americans’ inflation expectations for the year ahead fell for the fourth straight month in January, falling to 4.0% from 4.4% in December. According to the survey, this is the lowest price pressure since April 2021.

Atlanta Federal Reserve Bank President Rafael Bostic said he is leaning toward supporting a small interest rate hike at the Fed’s next meeting after Thursday’s report showed a further slowdown in inflation. This coincides with other comments from Fed officials. In fact, most Fed policymakers (except Bullard, who has always been more hawkish) agree to reduce the rate hike to 0.25%. Fed officials expect interest rates to exceed 5% this year and remain at that level until 2024, according to projections.

Investors will keep a close eye on the start of the reporting season this week to see if US companies can beat estimates amid concerns. Goldman Sachs (GS) and Morgan Stanley (MS) are due to report earnings before the opening on Tuesday, followed by Procter & Gamble (PG) and Netflix (NFLX) on Thursday. According to Refinitiv, annual earnings for S&P 500 companies are expected to fall by 2.2% for the quarter. This will be the first quarterly decline in US earnings since the third quarter of 2020,

Stock markets in Europe were mostly up Friday. Germany’s DAX (DE30) increased by 0.19% (+2.97% for the week), France’s CAC 40 (FR40) added 0.69% (+2.36% for the week), Spain’s IBEX 35 (ES35) jumped by 0.61% (+2.19% for the week), the British FTSE 100 (UK100) closed Friday up by 0.64% (+1.88% for the week).

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The British GDP grew by 0.1% last month, while it was expected to decline by 0.2%. Despite the positive data, analysts point out that GDP has shrunk by 0.3% in the last three months and economists believe that a recession can only be postponed but not prevented. Moreover, the effects of the Bank of England’s monetary tightening have yet to affect the economy fully. Along with the corporate tax hike to 25% and the expiration of the tax credit for new investments, the economy will only shrink.

Fitch Ratings raised its outlook for the ECB’s policy rates as the Central Bank became much more concerned about core inflation pressures and signaled that rates would reach higher levels. Economists believe the ECB will raise the refinancing rate (MRO) to 4% (previously: 3%) by May 2023, and the deposit rate (DFR) will reach 3.5%. In total, there will be a 150 basis point increase in 1H 2023, starting with 50 basis points at each of the ECB meetings on February 5 and March 16, 2023.

Gold prices rose last week after the December inflation data release. Gold has approached a nine-month high and is trading near the key resistance at $1,950 an ounce. The US dollar continues to fall, which positively affects the precious metals, which are inversely correlated to the dollar and US government bond yields. Gold prices are rising as analysts believe the Fed is at the end of its rate hike cycle.

The US inflation easing play is also helping oil bulls, although rising oil prices alone could eventually lead to higher inflation. WTI crude oil increased by 8.54% over the past week. British Brent crude for March delivery added 8.73% for the week in London trading on Friday.

Asian markets were mostly up last week. Japan’s Nikkei 225 (JP225) gained 1.47% over the week, China’s FTSE China A50 (CHA50) gained 3.13%, Hong Kong’s Hang Seng (HK50) increased by 2.08%, India’s NIFTY 50 (IND50) declined by 0.19%, and Australia’s S&P/ASX 200 (AU200) added 3.07%.

The Bank of Japan (BOJ) may adjust its yield control policy to roll back monetary stimulus this year if wage increases continue to spread. The BOJ may also slightly revise its inflation forecasts for the fiscal year beginning in April as companies continue to raise prices on a wide range of goods. Markets are still reeling from rumors that the Bank of Japan will soon abandon its Yield Curve Control (YCC) policy and begin raising interest rates.

In the commodities market, futures on lumber (+18.01%), gasoline (+13.05%), Brent oil (+8.73%), WTI oil (+8.54%), copper (+7.84%), sugar (+4.01%), corn (+3.33%) and gold (+2.85%) showed the biggest gains last week. Futures on natural gas (-6.17%), coffee (-4.86%), cotton (-3.82%), and platinum (-2.65%) showed the biggest drop.

S&P 500 (F) (US500) 3,999.09 +15.92 (+0.40%)

Dow Jones (US30)34,302.61 +112.64 (+0.33%)

DAX (DE40) 15,086.52 +28.22 (+0.19%)

FTSE 100 (UK100) 7,844.07 +50.03 (+0.64%)

USD Index 102.18 -0.07 (-0.06%)

Important events for today:

– World Economic Forum Annual Meetings at 10:00 (GMT+2);
– UK BoE Gov Bailey Speaks at 17:30 (GMT+2);
– Canada Business Outlook Survey 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.

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The US Fed is likely to reduce the pace of rate hikes. The ECB remains on an aggressive path