The thaw in many markets, even those as risky as cryptocurrencies, may be a sign of the start of a new trend. However, central bankers still have plans to tighten monetary policy. Japan may see its first interest rate hike in many years. What have we been able to find out this week and what to look out for in the coming days?
Macroeconomic data
On Tuesday, we learned the short-term energy outlook from the EIA. The average target price for Brent crude oil fell from $92 to $83.1. The report also gives a forecast for US GDP growth in 2023 and 2024, where it is expected to grow by 0.5% and 1.9% respectively. Oil and gasoline prices are likely to fall due to the increasing reliance of electricity generation on so-called renewable sources.
Source: Conotoxia MT5, XBRUSD, Daily
A conference call by the Federal Reserve chairman took place on the same day. Jerome Powell stated that the Fed's monetary policy independence was an important and widely supported institutional arrangement that had served the American public well. He also emphasised that the Fed must continually earn this independence by using tools to achieve its assigned goals, such as maximum employment and price stability, and by providing transparency to facilitate understanding and effective oversight by the public and their elected representatives in Congress. This seems likely to emphasise the importance of fighting inflation.
On Wednesday, we learnt the weekly US crude oil inventory reading. The forecast was for a decline in inventories of 2.2 million barrels of oil. Meanwhile, we saw a surprising increase of nearly 19 billion barrels. The largest weekly increase in inventories since March 2021 may signal that the current use of most refining capacity has exceeded its consumption capacity.
Thursday seemed crucial for global investors due to the US inflation reading. It turned out to be in line with analysts' forecasts. CPI inflation came in at 6.5%, falling for the seventh consecutive month. Significantly, the rate of decline in inflation appears to have been as rapid as earlier increases.
On the same day, the number of new claims for unemployment benefits in the US became known. Here, the data turned out to be more modest than estimated, amounting to 205 000 against expectations of 215 000. The US labour market appears very strong and unshakable, which may have a positive impact on financial markets. Both of these readings ( with the emphasis on the former) could have a positive impact on the S&P 500 Index (US500).
Source: Conotoxia MT5, US500, Daily
At the end of the week, we learnt the GDP reading from the UK. It came in below expectations at 0.2% y/y. (0.3% y/y was expected). This is a significant drop from the earlier reading of 1.5% y/y. This appears likely to be confirmation that the UK is entering a slowdown. This may be further confirmed by the industrial production volume reading, which fell by 0.5% m/m. (a fall of 0.2% m/m was expected), against a previous increase of 0.7% m/m.
The stock market
In the US stock markets, signs of optimism seem to be most evident in the technology sector, which has risen by an average of 8% since the beginning of the week. This could be seen in the performance of the Technology Select Sector SPDR Fund (XLK). In second place was the real estate sector, which increased its valuation by 7.75%.
Source: Conotoxia MT5, XLK, Daily
Q4 2022 financial reports will be announced today (13.01). Banking companies: JPMorgan (JPMorgan), Bank of America (BankofUS), or Wells Fargo&Co (WellsFargo). This kicks off the earnings season for the final quarter of 2022.
Currency and cryptocurrency market
Among currencies, the Japanese yen seemed to gain the most, which could be due to a break through the 0.5% level on Japanese bond yields. This level appears to be crucial after the Bank of Japan's announcement to maintain it. The market seems to be pushing the central bank to adjust its monetary policy to the current environment of rising inflation. These sharp movements have shown the lack of functionality in the Japanese government bond market over the past month and have created uncertainty ahead of the central bank of Japan's policy board meeting next week.
Japan's central bank revised its long-standing yield curve control measures last month, promising to restore order to the government bond market. This order was expected to be distorted by the program, which was designed to keep long-term bond yields below 0.5%. This situation could lead to a massive sell-off in Japanese assets, which in turn could drastically increase declines in the USD/JPY pair.
Source: Conotoxia MT5, USDJPY, Daily
The other major currencies were not characterised by similar volatility. The euro to the US dollar rose by 1.7%, breaking through the 1.08 level. This appears to be a continuation of the weakening of the dollar and a change in investor sentiment towards the euro area.
After long months, there are indications of a thaw in the cryptocurrency market. The price of bitcoin (BTCUSD) rose by more than 12% and that of ethereum (ETHUSD) by 12.5% during the week. The former cryptocurrency in particular broke through resistance at the US$18,000 level. Could this be confirmation of the start of a new trend for this market?
Source: Conotoxia MT5, BTCUSD, Daily
What can we expect next week?
Next week will start with Monday's reading of the ZEW German business sentiment index. The consensus is for a reading of -15.5 points (previously -23.3 points), which could be the fourth consecutive improvement in sentiment for this economy. On the same day, we will learn the GDP reading from China. This economy is expected to slow down with a reading of 2.8% y/y. (previously 3.9% y/y). On Tuesday, we will learn the inflation readings for the UK and Germany. Here the forecasts are 10.6% y/y. and 8.6% y/y. and are virtually unchanged from the last readings. Wednesday is expected to be particularly important for the markets, with further inflation readings from the euro area (CPI forecast at 9.2% y/y) and the USA (PPI forecast at 0.2% m/m). On Thursday, on the other hand, we will know the number of building permits issued in the United States. This indicator appears to have declined almost continuously since April 2022.
In the stock market on Monday, we will learn quarterly reports from more banks such as: Morgan Stanley (Morgan), Goldman Sachs (GS) and Citizens Financial Group (CitizensFin). On Tuesday, US financial conglomerate Charles Schwab (Charles) will report results. On Thursday, we will see the results of streaming service Netflix (Netflix) and one of the largest manufacturers of daily necessities Procter&Gamble (ProcterGmbl).
Grzegorz Dróżdż, Junior Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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