The last two weeks of the year are typically reserved for holidays and slow markets as much of the world is away from their desks after wrapping up the year. Indeed, many market participants finished trading a bit early this year due to last week’s onslaught of central bank meetings. With the benchmark S&P 500 up roughly 20% this year, why risk losing profits? However, as the Omicron variant of the coronavirus looms large heading into the end of the year, it could make for some volatility during illiquid markets. In addition, there is still some data that markets will be watching, such as the Fed’s favorite measure of inflation, Core PCE.
For traders who were looking for major central banks to turn more hawkish into the end of the year due to the surge in inflation, they weren’t disappointed! The Fed, BOE, and ECB all complied. The BOE hiked 15 bps to 0.25%. The US Federal Reserve increased the pace of bond tapering from $15 billion a month to $30 billion per month, effectively ending their QE program in Mach 2022. In the Summary of Economic Projections, members are looking for 3 rates hikes in 2022 and 3 in 2023! The ECB had a slightly less dovish tilt, as it announced that the Pandemic Emergency Purchase Program would end in March 2022, as planned. And although it announced it would purchase EU40 billion of bonds in Q2, EU30 billion of bonds in Q3, and EU20 billion of bonds moving forward, it left the door open for a possible rate hike at the end of 2022. Even the ultimate dove, the BOJ, announced that it would stop buying corporate bonds at the end of its fiscal year (March 2022), which is a step towards tapering. The one consistent theme that these central banks pointed to as a reason for their “hawkish” slant was rising inflation.
What started out as just another variant of the coronavirus has turned into a possible worldwide aggravation. Is this variant more contagious? Probably. Will more people get sick? It sounds like it. Will more people end up in the hospital? It doesn’t sound like it. Will more people end up dying from the Omicron variant of the coronavirus? I’m not a virologist, but it doesn’t seem so. The Omicron variant is likely to become the most dominant variant around the world over the course of the next few weeks. Will everything shut down again? Not likely, which is why I labeled this variant more of an aggravation rather than a full-blown pandemic. The variant may cause growth to slow in Q1 as more and more people are infected. New daily cases in cities and countries around the world are rising by the day. But as this wave is expected to pass more like a hurricane rather than a month of slow rain, the slowdown should be limited. The next few weeks will be telling as to whether the variant is here to stay or will be gone as quickly as it arrives. As I mentioned, I am not a virologist, and this is just information I have gathered from my 1000-meter view.
With the holiday shortened week for much of the world, most of the data has been moved forward. However, because so many central banks met last week (and won’t meet again until the end of January at the earliest), many of the data points should have muted reaction. Data related to inflation will be the highlight moving forward. As such, the more important data of the week will be the release of the US PCE data and Japan’s CPI. Below are other economic data points to watch for this week:
- New Zealand: Trade Balance (NOV)
- UK: CBI Industrial Trends Orders (DEC)
- New Zealand: Westpac Consumer Confidence (NOV)
- Australia: RBA Meeting Minutes
- Germany: GfK Consumer Confidence (JAN)
- UK: CBI Distributive Trades (DEC)
- Canada: New Housing Price Index (NOV)
- Canada: Retail Sales (OCT)
- EU: Consumer Confidence Flash (DEC)
- US: 20-Year Bond Auction
- Japan: BoJ Monetary Policy Meeting Minutes
- UK: Current Account (Q3)
- UK: GDP Growth Rate Final (Q3)
- US: GDP Growth Rate Final (Q3)
- US: CB Consumer Confidence (DEC)
- US: Existing Home Sales (NOV)
- 5-Year TIPS Auction
- Crude Inventories
- Mexico: Mid-month Inflation Rate (DEC)
- US: Durable Goods Orders (NOV)
- US: Personal Income (NOV)
- US: Personal Spending (NOV)
- US: PCE Price Index (NOV)
- US: New Home Sales (NOV)
- US: Michigan Consumer Sentiment Final (DEC)
- Japan: CPI (NOV)
- Japan: Housing Starts (NOV)
Chart of the Week: Daily USD/TRY
Source: Tradingview, Stone X
This isn’t the first time we have seen this chart. USD/TRY was the Chart of the Week when the pair was breaking through 10.00. Just a few weeks later and the pair is up nearly 70%, reaching a high of 17.1667 before the central bank intervened to stop the devaluation of the Turkish Lira. Is the high in? Who knows? It would not be wise to try and pick a top here. The RSI has been in overbought territory since October, and there is no reason to believe that it will pull back into neutral territory any time soon. Given the rate of change for USD/TRY, the next strong resistance is not until the psychological round number at 20.00. However, there is minor resistance at Friday’s high of 17.1667. If the high is in, first support on the daily timeframe isn’t until the high of December 13th, at 14.6296, just ahead of the 38.2% Fibonacci retracement from the lows of November 10th to Friday’s high, at 14.3232. Horizontal support below there is at 13.8935 and then the 50% retracement from the same timeframe near 13.4449.
With central bank activity behind us this week, the focus will be on the direction of the Omicron variant and the inflation data. If you are reading this and happen to be trading this week, be careful. Year end markets tend to be slow, with bursts of volatility.
The Week Ahead will not be printed next due to the holidays, however there will be one for the beginning of the New Year on January 3rd, 2022!
If you are celebrating this holiday season, enjoy and be safe!
Have a great weekend and please remember to always wash your hands.