Global stock fell Monday as investors prepared for the last round transatlantic interest rate increases this year from three central banks. This is in hopes that an atypically slow pace of rising borrowing costs will finally ease.
Oil prices rose after a critical pipeline to the United States was closed, and Russian President Vladimir Putin threatened that production would be cut in retaliation against a Western price limit on its exports.
The dollar gained against the Japanese yen, but declined against a basket currency after data on Friday revealed that U.S. producers prices rose more than anticipated last month. This indicates persistent inflationary pressures ahead of Tuesday’s key U.S. consumer price index, which will indicate a slowdown of core annual inflation.
“A heavy events risk calendar this week is expected to establish the core themes for 2023,” ING bank declared.
ING reported that the market consensus still did not “underestimate” the possibility of inflation staying higher and was “dangerously second-guessing” the Fed regarding rate cuts in the second quarter of next year.
The MSCI all country stock market index fell 0.3%. It had lost 18% this year and will lose all gains in 2021.
In Europe, the STOXXX index 600 companies fell 0.7%.
Economists believe that the Federal Reserve and the European Central Bank will both raise rates by 50 basis point on Wednesday. This is still a significant decrease from the 75 basis points hikes at recent meetings.
Patrick Spencer, Baird Investment Bank vice chair of equity, stated that central bank will adopt a more cautious stance starting this week. Tuesday’s CPI data however will be crucial.
“It is the last week of the year. You don’t have any catalysts after this week. Spencer stated, “If the CPI is muted, we’re off the races and will get our year end rally.”
Spencer stated that regardless of the CPI, inflationary pressures are growing, with crude oil prices falling over the year and iron ore and lumber prices dropping.
“All this talk about recession, i think it is definitely in the market price, it’s in the markets. Spencer said that the key to recession is usually employment. I believe employment is going be stronger than people give credit for.
The S&P 500 futures and the Nasdaq futures had little change.
ASIAN SHARES ARE DOWN
MSCI Asia’s broadest index for Asia-Pacific shares outside Japan slumped 1.2%. It erased almost all of last week’s gains resulting from optimism that China is opening up its economy through the demise of its zero-COVID policies.
Japan’s Nikkei declined 0.2%
Chinese bluechips lost 1.1% and Hong Kong’s Hang Seng index fell 2.2%. This was because investors’ focus moved away from COVID-19’s crippling curbs to the escalating epidemic of infections currently disrupting the economy.
Although the Fed is expected to raise rates by 50bps on Wednesday at its last meeting in 2022, the Fed’s economic projections will be the main focus. Jerome Powell, Fed Chair, will host a press conference.
“We also want the understanding of if Jay Powell opens a door to a slowerdown to a 25% hiking pace from February. Again, while in line market pricing, it could be taken that this is closer to the end hiking cycle and is modest USD negative,” Chris Weston of Pepperstone’s research department said.
Kevin Cummins (chief U.S. economic economist at NatWest) said that although the Fed would likely move from a 50-basis point rate hike in November, any surprise in the CPI report in November was unlikely to change the Fed’s stance. However, it would play a larger role in Powell’s press conference and in the policy statement.
Although the U.S. dollar fell 0.143%, it still remained close to the five-month low of 104.1 a few weeks ago.
Sterling was flat at $1.2259 and the Australian dollar was 0.3% lower at $0.6745.
The Treasury yields were stable on Monday. The yield on benchmark 10-year Treasury notes fell to 3.5433% compared to its U.S. close at 3.5670%. The yield for two years was 4.334%, which is slightly less than the U.S. close.
Brent crude futures dropped 0.4% to $75.77 a barrel. U.S. West Texas Intermediate crude oil was at $70.84 a barrel, down 0.3%.
Spot gold was 0.4% cheaper at $1790 an ounce