Last week, the FOMC met and Powell gave a hawkish press conference that ignited fire in already volatile markets. Not to be overlooked, the Bank of Canada also set the stage for a rate hike in March. This week, the markets will hear about the RBA, the BOE and the ECB. The RBA should be less dovish while the BOE should remain hawkish. The ECB is apparently the only remaining major central bank to be dovish. Additionally, Russia and Ukraine will continue to make headlines as NATO and Russia build up their forces on the border. After AAPL’s bumper earnings last week, markets will get earnings results from GOOG, AMZN and FB this week. All eyes will be on the tips. And don’t forget NFP Friday!
BOC and the FOMC
Both the BOC and FOMC have presented scenarios that lead markets to believe that rate hikes will occur at their respective March meetings. BOC Governor Tiff Macklem said the “output gap has been closed,” while Fed Chairman Jerome Powell said the FOMC is considering raising rates at the March meeting. Additionally, Powell noted that “we are not making progress on the supply chain issue” and that he sees the risk of inflation staying higher for longer than expected. The two central bank leaders sounded more hawkish than their respective statements during their press conferences.
RBA, BOE and ECB
The RBA is likely to end its $350 billion quantitative easing (QE) bond purchase program and advance its rate hike forecast to around the first half of 2023. Target range of 3%. While it may become less dovish, its stance contrasts with the interest rate market, which currently forecasts one rate hike in April and three more rate hikes by December 2022.
The BOE is also meeting this week. Markets are pricing a 100% chance of a rally at its meeting this week. In addition, the BOE is expected to provide guidance on the unwinding of its balance sheet, which it says will begin once rates are at 0.50%.
Finally, the ECB is also meeting this week. Christine Largade and her friends have been extremely accommodating lately. Lagarde recently said the ECB has “every reason not to react as quickly” as the Fed. At its last meeting, the ECB said it would continue buying bonds until at least the third quarter of 2022 under the asset purchase program. (The PEPP program will expire in March). Note that the EU releases preliminary CPI data for January on Wednesday, the day before the meeting.
After meetings last week between Russia, France, Germany and Ukraine, Russia agreed to resume talks in two weeks. Russian Lavrov said Russia does not want war and agreed to meet American Bliken in a few weeks. This should give the opposing parties the chance to reach an agreement on what Russia considers a security threat. However, Russian forces continue to build on the border and US General Milley even went on to say that “considering the Russian forces deployed against Ukraine, if they were unleashed, they would be very large and horrible”! However, it looks like the talks will continue for the next few weeks before any “event” occurs.
Earnings season continues to roll. The most important aspect to note from many companies that have released reports so far is that earnings appear to be “in line” with analyst estimates. With the expectation of AAPL, the markets were disappointed and the after hours market volatility showed it! Can we expect more of the same this week? GOOG, AMZN and FB are some of the biggest names to report this week. The others are: BABA, GOOG, AMD, PYPL, XOM, SBUX, GM, QCOM, SPOT, ATVI, AMZN, F, FB
Despite the Chinese New Year week this week, China will release PMI data over the weekend. In addition, the day before the ECB meeting, the EU will release its preliminary CPI report for January. On Friday, both the United States and Canada will release employment data. Other major economic events (in addition to central bank meetings) include:
- China: NBS Manufacturing PMI (JAN)
- China: NBS Non-Manufacturing PMI (JAN)
- China: Caixin Manufacturing PMI (JAN)
- Japan: Retail sales (DEC)
- Japan: pre-shifted industrial production (DEC)
- Japan: Consumer Confidence (JAN)
- Japan: Housing starts (DEC)
- EU: Flash GDP growth rate (Q4)
- Germany: CPI prel (JAN)
- Canada: PPI (DEC)
- United States: Chicago PMI (JAN)
- Global: Final Manufacturing PMIs (JAN)
- New Zealand: trade balance (DEC)
- Japan: unemployment rate (DEC)
- Australia: Prel Retail Sales (DEC)
- Australia: RBA decision on interest rates
- Germany: Retail sales (DEC)
- United Kingdom: National House Prices (JAN)
- Germany: Evolution of unemployment (JAN)
- UK: BOE Consumer Credit (DEC)
- UK: Mortgage Approvals (DEC)
- EU: Unemployment rate (DEC)
- United States: ISM manufacturing PMI (JAN)
- United States: Construction expenditure (DEC)
- New Zealand: change in employment (Q4)
- Australia: RBA Map Pack
- Australia: Speech by RBA Governor Lowe
- EU: IPC Flash (JAN)
- EU: PPI (DEC)
- United States: evolution of ADP employment (JAN)
- Crude inventories
- OPEC meeting
- Global: Final PMI Services (JAN)
- United Kingdom: BOE decision on interest rates
- EU: ECB decision on interest rates
- United States: unit labor costs before (Q4)
- United States: Prel of non-farm productivity (Q4)
- United States: ISM non-manufacturing PMI (JAN)
- USA: Factory Orders (DEC)
- Australia: RBA statement on monetary policy
- Germany: Factory Orders (DEC)
- EU: Retail sales (DEC)
- Canada: job change (JAN)
- US non-farm payrolls (JAN)
- Canada: Ivey PMI sa (JAN)
Chart of the week: US 2-year weekly yields
Source: Tradingview, Pierre X
With Fed Chair Powell so hawkish at the FOMC press conference last week, it’s no surprise that short-term yields have taken off! During the week, US 2-year rates moved in a range from 1.037% to 1.228%, closing near 1.172%. This is the highest level since the start of the pandemic in 2022. On the weekly timeframe, the short-term yield was halted at the 38.2% Fibonacci retracement level from November 2018 highs to lows of the pandemic, nearly 1.202%. US 2-year yields also closed above long-term resistance at 1.145% for the week. Horizontal resistance sits above at 1.388% and then the 50% retracement from the recently mentioned time frame at 1.541%. The 61.8% Fibonacci retracement level is the next resistance at 1.88%. Below that, returns may fall to the 1.00% round number support level. Additional horizontal support below is 0.731%.
Central banks will again dominate the headlines this week. The BOE and RBA are expected to be on the hawkish/less dovish side while the ECB is expected to remain dovish. Any change in these expectations should move the markets. Also, pay attention to the Russia/Ukraine headlines. If it seems more likely that Russia will invade Ukraine, the ruble and the euro could go down. Any earnings surprise could also move the markets. Be prepared for more volatility this week!
Have a good week-end.