This Week In Markets: 31st Jan - 4th Feb 2022 (BoE, ECB, RBA, NFP, US earnings preview)

Okay, hello, welcome back to the channel and our look ahead for this week. And boy, have we got a, a week in store. That's central bank decisions, you've got the ECB, the Bank of England, the RBA. We've got non-farm payrolls, so that also means things like ISM manufacturing, non-manufacturing, ADP, weekly jobless. We've got plenty more to watch in terms of the Russian-Ukraine situation with potential sanctions coming by way of the US and the UK and other western nations. And We haven't even spoken about earnings where we've got 109 S&P companies coming out this week. And that does include the likes of Meta, also Amazon as well coming out, as well as Alphabet or Google to hit the tape. Before I begin, big shout out to Rafa Nadal. Absolutely incredible comeback and greatest of all time. Drop a comment below. Let me know, what do you think? Federer, Nadal, Djokovic. Who is the GOAT? Got to say, Nadal's taking it here at 21. Also, for any US followers, Tom Brady also calling it a day after an amazing career. So otherwise, back to business and let's talk about what's happening in markets this week. And first off, really just capping where we left, the kind of Fed rhetoric, which was this idea then on the coattails of the Fed meeting that they're not ruling out hiking at every meeting. Now that has somewhat diluted then the impact of comments such, such as these. And one thing to remember as well is that from a Fed tactical point of view, this is often what they do when they start to drip feed in new ideas of potential policy direction in the future. They'll do that through non-voting members, of which Raphael Bostic, who you can see here, is one of those, tends to also lean more center to the hawkish side of the kind of policy spectrum. So that's not too untoward. But he said that the Fed could opt to raise its benchmark rate by 50 basis points. A more aggressive approach to taming inflation is needed. But he did stick to his prediction that 3 quarter-point increases starting in March is the most likely scenario. But 50 basis points, obviously the market has been priced as aggressive as that. And we've also had banks like the Japanese uh, firm Nomura, who are already putting their name behind a 50 basis point call for that March meeting for rate liftoff. And so others have followed suit in terms of the, the rate hiking number. Jan Hatziass of Goldman Sachs, chief economist, have updated their call now predicting the Fed will lift its near-zero benchmark rate by 25 basis points 5 times this year. So they've gone from 3 to 4 to 5 now in pretty quick succession. That would take the benchmark rate to 1.25% to 1.5% by the end of 2022. Of course, they also say they expect officials to announce the start of a balance sheet reduction in June. So also bringing that timeline a little closer given the more hawkish rhetoric we heard from the Fed in the meeting last week. Just to give you a flavor on the street, Bank of America, the most hawkish, they're looking for a meeting at a hike at every meeting. So 7 more, 8 to be delivered in the year. And BNP Paribas going for 6, JP Morgan and Deutsche Bank are going for 5 at this present point in time, alongside now with Goldman Sachs. So moving off the Fed side of things, um, but before I do, just one quick chart I wanted to show you just in terms of a 50 basis point rate hike. When was the last time that they have done that? Um, so from a historical point of view, you've got to go all the way back to May of 2000, the last time they went for this stepstone approach, but in a more aggressive fashion. Remember, interest rate cycles tend to take the stairs up and the elevator down in terms of the response then usually to the dot-com bubble or financial crisis or an unforeseen coronavirus outbreak as, as what we've had. So, um, 50 basis points, um, for me at this point in time, what it's worth, I think that will not happen. I think it will be more incremental than that, albeit multiple throughout the year. All right, other news to get you up to speed on. I've talked about Goldman, so going to talk about some Chinese data. Official PMI data came out over the weekend. It declined to 50.1. Expectations were for 50, so basically it was in line. Non-manufacturing gauge fell to 51.1, also just marginally above expectations. One thing that analysts have noted though is that Chinese factories often see a production lull in January and February. Workers head home for Lunar New Year holiday, and And it is Chinese New Year tomorrow. So don't forget that Chinese markets are closed all week. Activity has also been affected this year by the government's orders for steel plants specifically to trim output to reduce air pollution ahead of the Winter Olympics in Beijing, which began, of course, just last week on Friday. And of course, from a government level, there's a lot of optics given the number of eyeballs that will be on that country during that Winter Olympic Games. The PMI also released on Sunday fell to 49.1, the worst in almost 2 years. The private survey of which that is referring to in contraction focuses on smaller, more export-oriented firms compared with the official manufacturing PMIs, which were just hovering above in expansionary territory. What's happening on the Russian-Ukraine front? Well, this is the kind of latest headlines you've got on Reuters. US senators apparently are very close to reaching a deal on legislation to sanction Russia over its actions on Ukraine, including some measures that may take effect before any invasion, according to two leading senators. What they said on Sunday, the Senate bill would target the most significant Russian banks and Russian sovereign debt, as well as provide more U.S. military assistance to Ukraine. There are still areas of disagreement apparently between these senators from two parties, especially over whether to impose sanctions on the Nord Stream 2 gas pipeline, which is that highly contentious issue and obviously has big detrimental impacts to parts of Western Europe, namely the likes of Germany and so on. Meanwhile, on that front, if we're looking at what's happening a little bit closer to home, and we're to talk about Russia, Ukraine, and what the UK are thinking, um, we have Russian oligarchs with links to Putin who have UK investments will be hit by tough new sanctions if Moscow invades Ukraine. That's according to the Foreign Secretary. You can see here Liz Truss, who will be talking at the House of Commons on Monday. So for once she's not talking about Brexit, she's now talking about UK and Russia for a change. And then the final kind of headline from the weekend before we look at what's in store for the week ahead on the schedule was in Italy, and Italian lawmakers have reelected the incumbent Mattarella as head of the state, ending a week-long stalemate over the selection and ensuring the survival then of Mario Draghi's government really goes to show the kind of status quo, I guess, of how messy Italian politics has been for quite a period of time. They still have this kind of technocrat government holding in place that's been Mario Draghi, and that will continue as far as markets are concerned. They typically like continuity, and so not looking for too much reaction on the back of this development. And then just before talking data, we do have earnings season, as I mentioned. So just to name some of the big names as we go through the US throughout the week, pre-market on Tuesday, ExxonMobil, UPS, aftermarket likes of Alphabet or Google, AMD, Starbucks. And then on Wednesday, aftermarket Meta, Qualcomm, likes of Spotify as well. And on Thursday you've got Nokia, pre-market Merck. Didn't say Nokia still reporting earnings on, on their own. Yep, they are still alive. Even in 2022. And then you've got Amazon, probably the big one. So the kind of 3 big giants that you're looking for: Tuesday, Alphabet; Meta on Wednesday; Amazon coming out on Thursday. And then, yeah, don't forget, before I talk about the year ahead, gong hei fat choy for any Cantonese listeners. It is the Year of the Tiger. That does mean that Chinese markets, they will be closed. For the entirety of the week, and also Hong Kong shut for the best part of it as well. So do bear that in mind in terms of the overnight session. Um, but in terms of the calendar, it really kicks off in earnest quite quickly. The beginning of the week, we do get the flash GDP numbers from the eurozone, and this follows up then on Wednesday when we get the CPI numbers, and then we get the ECB meeting happening on Thursday. So busy week in the eurozone. Eurozone flash GDP will be closely watched to give a sense on how big the impact of the fourth wave of the coronavirus has been or has had on the eurozone economy. And then the flash CPI is also due on Wednesday ahead of the ECB meeting, as mentioned, expected to show a modest decline in January, although gas prices are likely to elevate inflationary pressures. Analysts at ING note that German VAT effects will jump out of the numbers or drop out of the numbers. And oil price base effects will also play more favorable to see then a top-level decline in that figure. Um, moving further on though, going into Tuesday morning our time, so Tuesday in Australia, we do have, um, the latest from the RBA where all but one 17 analyst poll by Bloomberg expect the central bank there will end quantitative easing The bank is also releasing updated estimates on Friday that are, that are likely to see an upgrade to the outlook for employment and inflation. And of course, don't forget, due to the calendar, um, when they run into non-farm payrolls on the first Friday of the month, that does mean that we get also jobs data in the US. But ISM Manufacturing comes out on Tuesday, expected to pare a little to 57.5 from around, uh, 58.8 the prior time. While the street expects the service headline on Thursday to pare back also to 58.7, down from a very hot 62.3. And then just looking at some other things, we do have, of course, OPEC. So they'll be holding their regular monthly meeting. Not really looking for any surprises here. The group expected to continue its plans to ease supply curbs by 400,000 barrels per day in March. So they have this meeting today. Determine what they're going to do for the month ahead. Delegates have downplayed the significance of the price moves we've had of late. Remember, as far as WTI crude is concerned, at the close at the end of last week in electronic trade, we finished at just short of $89. So we are trading very high at the moment. Of course, multi-year highs that we've printed, of course, in other products in the energy space. Although they've downplayed that, that is a function of increasing geopolitical risk premium as opposed to strengthening demand fundamentals is what they're likely to put the spin on it as to then just continue to push ahead with their predetermined plan at this point in time. One of the arguably most interesting events of the week is going to be the Bank of England. They surprised the markets and hiked rates already at the end of last year, and they're widely expected to raise rates for a second consecutive month at their meeting on Thursday. Not so much the rate hike in itself, that's very much priced into markets. It's going to be the conversation that they have about what happens thereafter on the process of winding down the bank's £875 billion of holdings of government debt purchased via its quantitative easing program. Eyes also, and attention will be firmly fixed on, do they push back against the fairly aggressive and hawkish market pricing of 5 rate hikes to be executed for this year. Likelihood is probably not. They'll probably just keep that on the table for now and then can also push back about, uh, against that later on down the line. One would expect is the most likely outcome there. As far as the ECB is concerned, much less interesting, I would say, than certainly the Bank of England will be. Both of these events coming out on the same day on Thursday. As far as the ECB is concerned, they're not going to change policy. That's very much expected, even despite facing a surge of inflation that's being seen at the moment. Uh, Nomura, they say their economists, they expect no change to policy or guidance, and they think that the ECB will be in a position to begin a slow normalization of policy rates from June 2023. So you can see the big divergence we have at the moment when we're talking about the potential for another 7 rate hikes in the US and perhaps the policy rate's not moving in Europe until the summer of next year, never mind this year. And then back to the calendar, just to wrap up then. Of course, we get the ADP national employment figure on Wednesday, expected at 150,000. You got weekly jobless claims on Thursday, and that then sets us up for non-farm payrolls on Friday. The headline reading there, according to surveys at Bloomberg, is that the US is set to add 175,000 jobs in January. Compared to the 199 it added in December. The unemployment rate is forecast to hold steady at 3.9%. Meanwhile, average hourly earnings, though, are expected to creep up again from 4.7% to 5.2%. Some analysts have cautioned that even though the headline is expected at 175, there's a risk that we could actually see jobs contraction, i.e., a negative headline print. And likely that's due to the highly transmissible Omicron and it hitting the leisure and hospitality sectors specifically, like what we've seen in the previous waves over the two years gone by. That's also likely to have also had a degree of impact in healthcare and other service-related industries, of course, which are the ones that get most impacted by certain restrictions that might be put in place on a state level. However, even if we get a negative headline, Is that really going to change the direction of what the Fed are thinking? I would say highly unlikely on two points. One, the inflation situation, and then two, the fact that if you actually look at current US COVID case rates, they have been declining and quite rapidly at this point. So going further forward, there's probably enough confidence to continue down the path that they've insinuated so far from Fed officials at the meeting. Last week. So that is it. Pretty rapid pace, I know. So feel free to jump on Twitter. Full briefing notes are available there. I always post them every morning ahead of the European session. Otherwise, I'm gonna let you get on with things. Please remember to like and subscribe to the channel if you've not already done so, and I'll see you for the next video that comes out later this week. All right, take care.