All about inflation By Reuters
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© Reuters. FILE PHOTO: People shop at a supermarket in London, Britain December 24, 2021. REUTERS/Kevin Coombs/File Photo
(Reuters) – Inflation is front and center: Markets will look to the U.S. Federal Reserve for when and how much it might tighten policy to tackle inflation at 40-year highs, if CPI data forces Australia to admit the need for earlier rate hikes, and what PMIs say about skyrocketing service sector costs.
Earnings also illustrate the pressures on corporate wage costs. And finally – politics will complicate the picture with Russia, Ukraine and Italy in the frame.
Here’s to your week ahead in the markets of Ira Iosebashvili @IraIosebashvili in New York, Kevin Buckland in Tokyo, Dhara Ranasinghe @DharaRanasinghe, Julien Ponthus @JulienReuters and Sujata Rao @reutersSujataR in London.
1/ COUNTDOWN TO TAKE OFF
If the markets are right, the January 25-26 Fed meeting will be the last before interest rates rise.
About four rate hikes are scheduled for this year, starting in March, but rate outlook aside, markets will listen to what the Fed says about its balance sheet of more than $8 trillion.
Minutes from the December meeting showed lengthy discussions about reducing bond holdings. Fed Chairman Jerome Powell said the balance sheet could shrink faster than in the past.
A Reuters poll predicts that the Fed will begin to reduce its balance sheet by the end of September, although some believe this could happen sooner and faster than expected. Warmongering signals could prolong the sell-off in Treasuries and tech stocks.
Meanwhile, the Bank of Canada is not waiting for its neighbor and could start raising rates as early as Wednesday.
CHART: FED AND RETURNS, https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwjebzpo/Pasted%20image%201642526443746.png 2/GAINS: BEWARE OF THE ATLANTIC GAP!
Could 2022 be the year European equities break a six-year streak of underperformance relative to their US peers?
The old continent is home to an army of cyclical and value (read cheap) stocks like banks, which typically outperform tech in times of monetary tightening. With Wall Street lagging the European markets this year, this dynamic already seems to be at work.
Q4 earnings season offers encouragement for European bulls; Refinitiv I/B/E/S data shows earnings jumped 49% year-on-year. Luxury groups Richemont and Burberry wowed the markets with quarterly updates. European profits also seem less threatened by wage inflation, Barclays (LON 🙂 analyst note.
US earnings are expected to rise 23%, and markets are still coming to terms with Goldman Sachs’ (NYSE) shortfall and steep cost increases.
In the coming days, European names LVMH, STMicro and Philips are among those reporting and IBM (NYSE:), Verizon (NYSE 🙂 and Apple (NASDAQ 🙂 in the US.
CHART: Earnings Growth, https://fingfx.thomsonreuters.com/gfx/mkt/znpnelgjbvl/Pasted%20image%201642600245725.png CHART: STOXX vs S&P Earnings Forecasts, https://fingfx.thomsonreuters.com/gfx/mkt /akvezewegpr/earnings%20theme.PNG 3/WANTED: NEW ITALIAN PRESIDENT
Italy needs a new president and the complex process of replacing outgoing Sergio Mattarella begins on Monday, with Prime Minister Mario Draghi in the lead for the job.
It could mean weeks of political instability for Italy. If Draghi gets the job, a new prime minister must be found and the cross-party coalition supporting his government could collapse. The same could happen if the parties fail to agree on another candidate.
All this as bond market anxiety grows over rising inflation and a more aggressive response from the ECB. Russian troop buildups near the Ukrainian border are fueling war fears, meaning broader geopolitical developments will continue to capture market attention. GRAPHIC: Italy needs a new president, https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnjejgpq/Italytheme2001.PNG
4/ PRICES UP DOWN?
The Fed is not the only central bank to have underestimated inflation. Australian CPI data on Tuesday may well force Reserve Bank of Australia Governor Philip Lowe to capitulate on his longstanding assertion that rate hikes this year are “extremely unlikely”.
Money markets have long doubted the Lowe’s (NYSE) scenario and are pricing in an initial quarter-percent hike as early as May with at least three more quarter-point increases by the end of the year.
Australia’s unemployment rate has plunged to its lowest since 2008 and some economists are predicting core inflation could hit its highest since 2009 at 2.5%. At the very least, such a reading should seal the end of pandemic bond buying at the February 1 RBA meeting. GRAPH: RBA Inflation Test, https://fingfx.thomsonreuters.com/gfx/mkt/xmvjobdjepr/Pasted%20image%201642685575045.png
Given the spread of Omicron, global business activity held up surprisingly well in December, according to purchasing managers’ indices (PMIs). But when January’s advanced PMIs emerge on Monday, the focus will be on how cost pressures are building.
Composite input prices fell last month as factory supply chain delays eased, but U.S. service sector input prices hit their highest level since 2009. In Europe , they remained close to November’s record level and rose in China for the 18th consecutive month.
In countries where services account for the lion’s share of economic output, soaring costs add more uncertainty to the inflation outlook. GRAPHIC: Input Costs, https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwjbyovo/Pasted%20image%201642626686730.png
All about inflation By Reuters
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