A look ahead for the day ahead in the US and global markets by Mike Dolan.
Market optimism for the new year will face a series of critical tests later this week as the first soundings of the year from the US Federal Reserve cool any hopes of a major shift in policy focus there.
Fed Chair Jerome Powell is laying out his thoughts for the first time in 2023 later Tuesday at a G10 mega-central banking event hosted by Sweden’s Riksbank and attended by governors from the Bank of Japan, the Bank of England and the Bank of Canada participate.
But Powell’s colleagues have already fired a shot across the bow at market prices.
Although futures markets now expect Fed interest rates to rise below 5% by mid-year and fall by as much as half a point by year-end, two Fed policymakers speaking on Monday still saw rates over 5% increase and likely to stay there for all of 2023.
San Francisco Fed Chair Mary Daly and Atlanta Fed Chair Raphael Bostic said they expect Fed interest rates — now at 4.25% to 4.5% — to fall to a 5 % must rise to 5.25% to ease inflation.
But both said Thursday’s U.S. consumer price report would be crucial in determining whether the Fed decides to hike by a quarter point at its upcoming meeting instead of the larger jumps it has used for most of 2022. Bostic said further cooling in inflation means he needs to take a quarter-point raise “more seriously”.
Consensus forecasts see headline CPI inflation falling to 6.5% in December from 7.1% in November and core interest rates falling back below 6%.
The combination of Powell’s appearance and the upcoming inflation gauge kept markets around the world in check on Tuesday, with European and Asian bourses and Wall Street stock futures remaining flat to negative. US 10-year Treasury yields firmed off Monday’s 3-week lows, and the dollar also stabilized after hitting a 7-month low.
Although there were encouraging signs of disinflation in Europe last week, the picture was less rosy in Japan – where markets are suspecting the Bank of Japan could tighten monetary policy this year.
Core consumer prices in Japan’s capital, a leading indicator of nationwide trends, rose faster-than-expected in December by 4.0% yoy, beating the central bank’s 2% target for the seventh straight month and the fastest pace in four decades .
Optimism over China’s reopening has been a key factor in global markets’ rebound so far this year, but Beijing seems uneasy with the associated rise in the yuan to a five-month high this week, and the currency weakened today.
Investors should avoid Chinese currency risk and adjust to higher exchange rate volatility, three state-run financial newspapers in Shanghai and Beijing said in front-page comments on Tuesday. While the currency has strengthened, it will be volatile in both directions this year, they warned.
Since the newspapers carried essentially the same message on the same day and on their front pages, they had almost certainly been instructed to do so by the government.
The major political risk factor of the new year now appeared to be under control and Brazil’s markets remained fairly resilient on Monday.
Far-right former Brazilian President Jair Bolsonaro was rushed to a Florida hospital with abdominal pain on Monday as 1,500 of his supporters were rounded up in Brasilia after storming key buildings in the capital over the weekend.
President Luiz Inacio Lula da Silva, who took office on January 1 after beating Bolsonaro in October’s elections, vowed to bring those responsible to justice and questioned why the army wasn’t responding to calls for a military coup outside their barracks got discouraged.
The other major headwind of the week is the start of the US corporate earnings season.
The US banking giants are forecast to report lower fourth-quarter earnings this week as lenders stockpile rainy-day funds to prepare for an economic slowdown that hits investment banking. Four American banking giants — JPMorgan (JPM.N), Bank of America (BAC.N), Citigroup (CN) and Wells Fargo (WFC.N) — announce earnings on Friday.
Along with Morgan Stanley (MS.N) and Goldman Sachs (GS.N), they are the top six lenders expected to have combined reserves of $5.7 billion. That’s more than double the 2, $37 billion committed a year earlier.
Late Monday, investment bank Jefferies (JEF.N) reported a 52.5% fall in fourth-quarter profit, impacted by lower subscription fees and volatile markets that hurt revenue from its trading desks. But the company still posted its second-best year for investment banking revenue, well above 2019 levels, said chief executive officer Richard Handler and president Brian Friedman.
Logged events and data releases that could provide direction for US and world markets later on Tuesday:
* US Dec. NFIB Small Business Survey. US Treasury sells 3-year notes.
* Federal Reserve Chairman Jerome Powell, Bank of Japan Governor Haruhiko Kuroda, Bank of England Governor Andrew Bailey, Bank of Canada Governor Tiff Macklem and European Central Bank Board Member Isabel Schnabel all speak at one Event of the Swedish Central Bank.
* US Corporate Earnings: Bed Bath & Beyond, Albertsons
US/Eurozone economic gap surprises Reuters Graphics Reuters GraphicsReuters GraphicsReuters Graphics
Adapted from Mark Potter by Mike Dolan
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