Week in Review
Well, we’re at the end of another exciting week of trading with the Dollar flat, stocks higher, oil slightly relatively subdued and treasuries lower. Interesting week as yields push higher and the S&P looks set for a gain, which recently has not been the expected outcome of that sequence of events.
After a positive end to last week, on Monday there was another aggressive rally across risk, pushing the S&P back towards that critical junction point of the long term trendline and 4000. We’ve managed to establish ourselves above it at the time of writing and that is definitely a positive sign, but we need to proceed with caution as ultimately there are still headwinds, with the FED still hiking rates, the economy facing uncertainty moving forward, and rising commodity prices off the back of China’s reopening, potentially causing continued inflationary pressures. Cautiously long at the moment seems fine, but there is next week to think about when the FED are out for the first time in 2023.
Monday and Tuesday hadn’t much in the way of fundamental news flow, other than some ECB rhetoric that inflation was too high and they must bring it down, still need to hike rates and all that fun stuff that we’ve heard a million times before. Not much for us to do with that really if I am honest. Looking for that sort of commentary stopping is much more important for us to listen to as traders.
Into Wednesday and inflation was back in focus as we received hot CPI prints from down under. Australia more so, with a 0.3% beat on consensus from the previous MoM and YoY prints. AUD strength into Wednesdays European session was clear to see but that had a pull back as a deterioration in risk off the back of news that Germany and America would send tanks to Ukraine to help with the ongoing war in the country. Nothing in the way of any retaliation from the Kremlin so far but to be honest I am not sure what they can do. They know nuclear warfare is not a route that is going to end well for them, so a non-event as of now as they aren’t really going to do much more than they already are.
Into the Bank of Canada then with what they say is the last hike of the cycle, bringing the rate from 4.25% up to 4.5% with the commentary that it expects rates to be held at this level if the economy continues to develop in line with its forecasts. It is prepared to continue hiking if needed to cool down inflation further, but with the economy very sensitive to hikes due to elevated household debt and quite overvalued housing, they will be reluctant to keep hikes going if they don’t have to. The biggest risk to this will be if China’s reopening continues to gather pace and global commodities and oil prices continue to rise, further pressuring inflation and therefore increasing the need for more hikes.
Onto the US data then through the rest of the week. Positive durable goods and positive GDP on Thursday, which initially gave stocks a bit of downside, but it does signal that the economy is maybe not faring as badly as some market participants may have thought. Inflation then on Friday with the PCE figures in line with expectations. A bit of a rally at the open today probably shows that markets feel the same, and it will be interesting how we close today to see if they do feel that a dovish surprise next week is on the cards.
Into next week then with a raft of central bank announcements. The FED to kick things off on Wednesday with a further 25bps hike, but with markets currently slightly unsure of where they will actually end, we do await further guidance on the terminal rate. The FED had suggested a 5.1% terminal rate but there are some market participants who believe they will go on hold after next week. I think a further 25bps after that is on the cards personally.
The BOE and the ECB are out on Thursday and with the ECB’s hawkish rhetoric over the last number of weeks, we do expect further hikes from them moving forward. They will probably just reiterate this on Thursday and may be a non-event. The BoE may be the same, but with the bank predicting a recession starting in Q4 of last year which looks like may not materialise in Q4 at least, it will be interesting to see what they come out with.
To end the week, it looks like cautiously long stocks is a good play. The FED are approaching the end of their hiking cycle and markets believe they may potentially even cut later on this year. I say cautiously because we are technically still in a global hiking cycle, a potential recession is ahead and with the rising prices of commodities off the back of the Chinese reopening, it may keep inflationary pressures at the forefront of people’s minds. If they do confirm to us there will be no cut, you may see a sell off and some fresh opportunities to the downside.
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