It was a major week for the financial markets as traders were bombarded with top tier catalysts from all sides, including interest rate changes and leading economic indicators from around the globe.
Ultimately, risk sentiment turned sour before the weekend, and when combined with an extremely hawkish ECB statement, the euro was able to snatch the top spot against the major currencies.
Notable News & Economic Updates:
Despite the central bank’s efforts to increase lending and loosen limits on property loans, China’s credit grew at a little slower pace than predicted in November at 2T yuan ($287 billion) vs. a forecast of 2.1T yuan.
U.S. inflation data came in below expectations at 7.1% y/y vs. 7.3% forecast
The Federal Reserve Open Market Committee raised the target interest rate range by 50 bps to 4.25% – 4.50% range as expected on Wednesday.
China’s COVID and property sector weakness caused disappointing business and consumer activities data (industrial output, fixed asset investment, retail sales) in November
China sees full-blown outbreaks of COVID cases in major cities like Beijing, just a few weeks after easing up on zero-COVID policies. According to public health officials, China is facing a COVID surge that could lead to around 800M people being infected in the next few months
On Thursday, four central banks from Europe raised interest rates:
The European Central bank raised their key interest rate 50 bps to 2.00%
The Bank of England bank raised their interest rate 50 bps to 3.50%
The Swiss National Bank raised their interest rate 50 bps to 1.00%
Norway’s central bank raised their benchmark rate 25 bps to 2.75%
Global flash business survey data for December was released on Friday, with most surveys showing contractionary conditions.
Intermarket Weekly Recap
It was expected to be an action packed week in the financial markets with traders having to juggle a calendar full of top tier catalysts, including four major central bank monetary policy statements and inflation updates. Well, the markets didn’t disappoint as we saw a couple of major spikes in volatility and shifts in directional bias in the major asset classes above.
As expected, the start of the week was the calm before the potential storm as traders sat on the sidelines ahead of Tuesday’s U.S. CPI update. That number actually came in below expectations at +7.1% y/y (+7.3% y/y forecast), prompting the first big volatility move of the week.
It looks like traders initially took that as a signal to lighten up on bets speculating central banks can lighten up a bit on their current aggressive tightening regimes, leading to rallies in risk assets and a fall in bond yields and the U.S. dollar through Tuesday and Wednesday.
But then came the latest monetary policy decision from the FOMC on Wednesday, who hiked their target interest rate range by 50 bps as expected. This correlates with the top of the risk rally, and was likely shifted by Fed Chair Powell’s statement that the Fed expects to stay vigilant in its fight against entrenched inflation, signaling more hikes are coming in 2023.
Risk assets soured quickly after the event, and even accelerated to the downside on Thursday, likely sparked by four more central banks in Europe announcing 50 bps rate hikes, including the European Central Bank and the Bank of England.
Another contributor to the further decline in risk sentiment was likely the steady stream of headlines from China, which not only included weak economic updates, but also reports of number of COVID cases exploding in China just a couple of weeks after easing on zero-COVID policy.
On Friday, we saw one last leg lower in risk assets, this time likely fueled by another round of business survey updates, most of which confirming contractionary conditions around the world, with some even worsening, including in the U.S. which has been relatively resilient in 2022 to its peers.
Overall, with central banks confirming further monetary policy tightening in 2023 in an already weakening economic environment, and the potential for COVID to disrupt China further, it’s no surprise that safe have currencies lead the way this week. But it was the euro that took that top spot, likely boosted by a surprisingly very hawkish statement from the European Central Bank on Thursday.
USD Pairs
U.S. Budget Deficit in November: -$249B vs. -$248B forecast
U.S. CPI for November: +7.1% y/y vs. +7.3% y/y forecast; Core CPI +6.0% y/y vs. +6.1% y/y forecast
U.S. Import Prices in November: -0.6% m/m vs. -0.4% m/m previous (-0.2% m/m forecast)
The FOMC raised rates by 50 bps to 4.25% – 4.50% range as expected; Fed dot plot now sees “terminal rate” at 5.1% in 2023, no rate cut until 2024; Powell said that they have “some ways to go” on rates and it will take “substantially more evidence” to convince the Fed that inflation is on a sustained downward path
U.S. Retail Sales for November: -0.6% m/m vs. 1.3% m/m in October
U.S. weekly initial jobless claims fell by 20K to 211K vs. the previous week
NY Manufacturing Index dropped to -11.2 in November vs. 4.5 previous
U.S. Flash Manufacturing PMI in December: 46.2 vs. 47.7 previous
GBP Pairs
The U.K. economy expanded by +0.5% m/m vs. a +0.4% m/m forecast in October
U.K. Oct manufacturing production advanced 0.7% m/m after previous flat reading; industrial production was flat in Oct. vs. a projected 0.1% m/m dip
U.K. jobless rate edges up from 3.6% to 3.7% in the three months to October
U.K.’s real wages down by 2.7% (3m/3m) in October despite 6.1% wage increase
On Tuesday, the Bank of England issued a warning regarding “considerable pressure” on consumers and companies as a result of rising inflation and borrowing prices.
U.K. headline CPI slowed from 11.1% to 10.7% y/y in Nov.; core CPI fell from 6.5% to 6.3% y/y
Bank of England hiked their key interest rate by 50 bps on Thursday to 3.5%; hints that there is more to do
U.K. GfK consumer confidence index improved from -44 to -42 in Dec.
U.K. retail sales slumped by -0.4% m/m in November vs. a projected +0.3% m/m gain
Flash U.K. Manufacturing PMI at 44.7 in December vs. 46.5 previous
EUR Pairs
Germany Final CPI read for November: +10.0% y/y and -0.5% m/m
Germany ZEW Economic Sentiment Index rose to -23.3 in December vs. -36.7 in November
Euro area Industrial Production in October: -2.0% m/m; down by -1.9% m/m in the EU
The European Central Bank hiked the key interest rate from 1.5% to 2.0% on Thursday and signaled rates will need to rise “significantly” further; will begin to unwind its balance sheet in March 2023
Flash Eurozone Manufacturing PMI for December: 47.8 vs. 47.1 in November
Euro zone final CPI for November was revised higher to 10.1% y/y vs. 10.0% y/y prelim.
Euro zone Trade Balance for October was a deficit of -€26.5B vs. -€36.4B previous
CHF Pairs
The Swiss government expects an economic slowdown in 2023 to a below-average rate of 1.0%, but no recession.
Swiss producer prices index dropped by 0.5% m/m in Nov. to 109.2
Swiss central bank hikes interest rates by 50 basis points to 1.00% to counter a “further spread of inflation”
CAD Pairs
Bank of Canada Governor Macklem said on Monday that he’d rather raise rates too much than too little
Canada Manufacturing Sales in October: +2.8% m/m to $72.6B
Canada Housing Starts in November dipped to 264,159 from 264,581 units in October (255K forecast) – CMHC
Canada wholesale sales for October: +2.1% m/m to C$83.4B vs. a previous decline of -0.2% m/m in September
Canada New Home Price index fell by -0.2% m/m in November
NZD Pairs
New Zealand Visitor Arrivals for October: +6.8% m/m vs. +16.6% m/m previous
According to data released on Wednesday by Statistics New Zealand, New Zealand’s current account deficit for the third quarter of 2022 was NZ$5.9B
REINZ: New Zealand house prices fall -12.3% m/m in November as interest rates bite
New Zealand GDP was up by +2.0% q/q in Q3 (vs. +0.9% q/q expected, +1.9% uptick in Q2) as borders fully reopened
AUD Pairs
Australia consumer sentiment improved from 78.0 to 80.3 in December – Westpac
Australia business confidence index fell 4 points to -4 in November amid rising inflation and higher rates
Australia’s consumer inflation expectations moved lower from 6.0% to 5.2% in December – Melbourne Institute
Australia’s unemployment rate remained at 3.4% in November as 64,000 new jobs added
Australian flash manufacturing PMI down from 51.3 to 50.4 in Dec.
Australian flash services PMI fell from 47.6 to 46.9 in Dec.
JPY Pairs
Japanese Nov preliminary machine tool orders fell 7.8% y/y, following previous 5.5% drop
Japan Producer Price Index for November: +9.3% y/y vs. 8.9% y/y forecast
Japan Large Businesses Manufacturing Survey Index for Oct. – Dec. 2022: -3.6 vs. 1.7 previous
Japanese Tankan manufacturing index down from 8 to 7 in Nov vs. consensus at 6; non-manufacturing index up from 14 to 19 in Nov
Japanese October core machinery orders recovered by 5.4% m/m after previous 4.6% slump
Japan’s November trade deficit soars from 973B JPY to 2.03T JPY on weak yen, high oil prices
Japan Flash Services Business Activity Index for December: 51.7 vs. 50.3
