This Week In Markets: Fed, BoE & ECB Preview

Okay, happy Sunday, hope you are well. Thought I'd jump on early and talk about the week ahead because of course we've got 3 of the major central banks with decisions in the coming days, that being the Bank of England, European Central Bank, and the Federal Reserve. And I've also got some interesting stocks news to update you on, one regarding the airline makers Boeing and Airbus in a particularly large order that's been placed by Air India, and then a really big, potentially the largest healthcare M&A deal this year. So I'll, I'll explain more in a moment. But before I begin, check out the Retrader competition. I'll put the details to this in the comments of this video. And essentially we are running a competition through the month of December up to the 31st of this month where all you need to do is replay on your mobile phone 3 games of some of the most historic moves in markets of 2022 to be in with a chance to then have a fully sponsored place on our Summer Analyst Training Program in the summer of 2023. All you need to do is enter, play the 3 games, and it's totally randomized. We'll pick a winner at the end of the year and it'll be announced in the new year. So if you're a student, 100%, check this out. It would definitely be worth it. But look, let's dive in and let's talk a little bit about what we can expect, starting off with the US and CPI before we get into the FOMC, because on Tuesday we get the last piece of crucial information to really arm the monetary policy committee at the Fed of what their intentions are then, not just for the rate decision but for the subsequent period ahead. And obviously December being a very critical meeting because we're going to get the various projections as well about what they think about the economy. But let's just talk about the CPI for the moment. Now, if this number comes in low, then obviously it's likely to buoy share prices into year-end, might initiate that Santa rally because it's likely to temper then expectations around further Fed hikes in the future. The CPI report here, as you can see, stocks typically over the past 6 months, the S&P has had an average move of about 3% in either direction on the day that the CPI report is released. That's not that surprising. It's a particularly large degree of volatility, but not surprising because it is the key component that really has been driving policy decisions for the last 12 or 18 months. The actual headline reading on an annualized basis is expected to decline to 7.3% from 7.7%. But much like with the US, as we're going to get in the UK, the eyes will be on the core component as well. In terms of then for— that comes a day before the Fed. The Fed in itself is very much expected to hike rates by 50 basis points. The market probability at the moment is around 78% for that outcome. So investors are really much more focused on what Powell has to say in the press conference afterwards and looking for these potential hints about what comes next. Pricing in the futures market shows the Fed policy rate peaking at about 4.9% in the first half of next year. So if they do hike 50 as expected, The current market pricing further out would be indicative of one more 50 basis point hike to reach that peak then in this hiking cycle. Given it's a December meeting, of course, then the dot plot will be key of the Summary of Economic Projections of what the market will be basing its real movement on the back of, given how fairly assured the rate hike in itself is. And this is going to be about the trajectory of rate rises in the future and what does that look like. And one of the key things here is the New York Fed President John Williams, a close colleague of Powell. If you kind of look at the matrix of the hawk-dove list, Williams is pretty much aligned with Jerome Powell. And he said, well, he's indicated that he does not expect the bank to cut interest rates till at least 2024. So not next year. A dot plot showing tighter policy through the end of 2023 could then force investors at present betting on looser monetary policy to adjust those positions. Now, what might that mean? Higher yields, firmer dollar, negative for stocks in that, that kind of scenario. So that's the Fed, and that's coming on Wednesday. Bank of England. So the Bank of England is set to be a fairly contentious one actually, because the market is heavily priced that the BoE is going to hike rates The market implied probability is around 80% that they're going to lift rates by 50 basis points. That will take— this is the black line here. You can see they have been lagging the likes of the Fed, who are already on 4 and are going to be going higher, of course, this week. That would be then lifting up rates in the UK to the highest level at 3.5% in 14 years, for a bit of context. Now, some banks like Nomura, the Japanese bank, actually expect policymakers to be split 4 ways for the first time since 1997. So a little bit unique to the Bank of England, as opposed to the others— ECB and the Fed— we'll get this week is the Bank of England have 9 monetary policy committee members, and we get a vote count. So we know precisely what that split was. Now, if I just flash this up, this is the current look at the hawk-dove kind of barometer. Dove on the left, hawkish on the right. Obviously, in inflationary conditions, rates rising, most people are tilted to that side. But there's a big divergence here. You can see from Tenreiro and Dhingra all the way down to Catherine Mann and Johnson-Haskell. And what Nomura are saying is that potentially you could have a four-way split. So let me just break this down a little bit, and I'm going to use the Bank of America UK economist's forecast as a bit of a reference point. So he said that the vote split could be 2-5-2, so the total being 9. The split being 2 members voting for no change, 5 for a 50 basis point rate hike, which is the street consensus, and 2 for a 3/4 point increase. So the most hawkish, so you'd likely say in this case Mann and Haskell. Now if there was a 4th split, which is what Nomura is saying, which should be the first time since, was it the late '90s that that had happened, then the potential here is that one of the dubs opts for a quarter point increase. So you'd basically have members voting for no change, a quarter basis point, a 50 basis point move, and then a three-quarter percentage move. So that would be your split. How do you trade that sort of thing when it comes out? Well, I'd probably say, look, stay out of harm's way when there's that many the initial reaction would be so fiery in that situation, there's no point even attempting to try to trade it. The key there is going to be really what commentary comes out with this, because again, what makes the Bank of England unique, you get minutes alongside the policy statement and the, the vote count and so forth. So that's going to be quite critical. At the last two meetings, um, it hasn't been too unusual, the Bank of England's committee has been split three ways. And the balance of powers here has been based on that some members were concerned about persistent tightness in the UK labor market and signs of rising inflation expectations, whereas others— so the other side— they feared an 18-month lag for policy to take effect, meaning essentially by the time that these interest rate— these consecutive ones that have been happening— start to really hit the economy, it's going to come at a time when the economy really needs the most support. And so actually it's better to stop now. The other thing, of course, from the Bank of England is it's a really busy week in terms of calendar. So on Monday, as you can see here, you actually get GDP figures. They like to show the economy bounced back in October after a sharp decline in September when many businesses were closed, of course, for the death of Queen Elizabeth II. Tuesday we get jobs data, may show signs that wages continue to grow faster than the Bank of England's comfort level. And on Wednesday you get the inflation reading out of the UK, where for November may show a dip from the prior month's 11.1%, but the core reading is expected to be a little bit more sticky, and that's the one that the market more broadly will be looking at. So those data points all as a bit of a prelude to the actual rate decision which will come the day after. Changing tact then, and a quick talk about Christine Lagarde and the ECB. And so what they're trying to wrestle with here is the eurozone inflation is falling, the economy's on the brink of a recession, and interest rates are at their highest levels that they've been in Europe since the 2008 financial crisis. So most economists think it's time for the ECB to start to just ease off the, the pedal a little bit and start doing smaller rate rises. So we're talking a 50 basis point move, much in line with what we've just discussed about the Bank of England, the Fed, rather than the prior two meetings from the ECB where they've hiked by 75 basis points. Now, most economists expect the ECB to revise its inflation projections upwards for the next two years due to rising wages and the delayed impact of high energy costs hitting consumers. But most think the central bank will still forecast inflation returning to target by 2025. So remember, only for the ECB and the Fed do we get these latest projections. The Bank of England is on a different, slightly different cycle. The other thing, if we flip back to the calendar, that aside from the central bank decisions and those UK numbers, is on Friday we get the various flash PMI numbers, so UK included but also the eurozone, and they will show how the economy is faring at the end of the fourth quarter. Expect it to continue to signal contraction But by just how deep is the question for what markets and policymakers are really looking for. So quite a busy day to end the week. Now, just briefly, I mentioned two stock stories, and really because they're quite milestone ones. This is a picture of Air India. You might be wondering, why am I showing you an Air India, um, carrier? And the reason why is that that company is close to placing a landmark order for as many as 500 jetliners worth tens of billions of dollars from both split Airbus and Boeing as it carves out an ambitious, uh, renaissance under the Tata Group conglomerate. And this is all according to industry sources' reports over the weekend. Such a deal could top $100 billion at list prices, including any options, and it would rank among the biggest by a single airline in volume terms. So keep an eye on Airbus and Boeing at the market open. On Monday. The other companies to keep an eye on, um, to start off the week is this. This is in the Wall Street Journal. Amgen is in advanced talks to buy drug company Horizon Therapeutics, according to people familiar with the matter in the journal. It's a takeover likely to be valued at well over $20 billion and would mark the largest healthcare merger of the year if it were to proceed from this point. The US biotech company was the last of 3 suitors standing in an auction for Horizon, according to those sources. After the French drugmaker Sanofi said on Sunday it was now out of the running. All right, that is it from me. So hopefully that was useful. Feel free to drop any comments if you've got any questions at all. And don't forget to check out the Retrader competition if you are a student to win a fully sponsored place on our summer program next year. All right, that's it. Take care and I'll see you next time.