SYDNEY/LONDON—Shares slipped on Monday at the start of an agenda-setting week for markets in which likely interest rate hikes in Europe and the United States, as well as U.S. jobs and wage data, will give markets a fresh update on the battle against inflation.
Investors expect the Federal Reserve will raise rates by 25 basis points on Wednesday, followed the day after by half-point hikes from the Bank of England and European Central Bank, and any deviation from that script would be a real shock.
Earnings from tech giants will also test the mettle of Wall Street bulls, who are looking to propel the Nasdaq to its best January since 2001.
Europe’s benchmark STOXX index fell 0.5 percent on Monday morning, echoing a slight dip in MSCI’s broadest index of Asia-Pacific shares outside Japan, which has surged 11 percent in January so far as China’s reopening bolsters its economy.
Meanwhile, U.S. stocks were set to follow the nervous Monday mood with S&P 500 futures and Nasdaq futures down nearly 1 percent, as investors await guidance later in the week on the Federal Reserve’s policy.
Analysts expect a hawkish tone suggesting that more needs to be done to tame inflation.
“With U.S. labour markets still tight, core inflation elevated and financial conditions easing, Fed Chair Powell’s tone will be hawkish, stressing that a downshifting to a 25bp hike doesn’t mean a pause is coming,” said Bruce Kasman, chief economist at JPMorgan, who expects another rise in March.
“We also look for him to continue to push back against market pricing of rate cuts later this year.”
There is a lot of pushing to do given futures currently expect rates to peak at 5 percent in March, only to fall back to 4.5 percent by year end.
Apple’s Core
Yields on 10-year notes have fallen 33 basis points so far this month to 3.50 percent, essentially due to easing financial conditions even as the Fed talks tough on tightening.That dovish outlook will also be tested by data on U.S. payrolls, the employment cost index, and various ISM surveys.
Reading on EU inflation could be important for whether the ECB signals a half-point rate rise for March, or opens the door to a slowdown in the pace of tightening.
As for Wall Street’s recent rally, much will depend on earnings from Apple Inc., Amazon.com, Alphabet Inc., and Meta Platforms, among many others.
“Apple will give a glimpse into the overall demand story for consumers globally and a snapshot of the China supply chain issues starting to slowly abate,” wrote analysts at Wedbush.
“Based on our recent Asia supply chain checks we believe iPhone 14 Pro demand is holding up firmer than expected,” they added. “Apple will likely cut some costs around the edges, but we do not expect mass layoffs.”
Market pricing of early Fed easing has been a burden for the dollar, which has lost 1.6 percent so far this month to stand at 101.790 against a basket of major currencies.
The euro is up 1.5 percent for January at $1.0878 and just off a nine-month top. The dollar has even lost 1.3 percent on the yen to 129.27 despite the Bank of Japan’s dogged defense of its ultra-easy policies.
The drop in the dollar and yields has been a boon for gold, which is up 5.8 percent for the month so far at $1,930 an ounce.
The precious metal was flat on Monday ahead of the slew of key central bank moves and data releases.
China’s reopening is seen as a windfall for commodities in general, supporting everything from copper to iron ore to oil prices.
The oil market was hesitant amid concerns the likely Fed rate hikes could choke fuel demand, with Brent down nearly 1 percent $85.88 a barrel, while U.S. crude eased 87 cents to $78.8.
