<p>UPCOMING
EVENTS:</p><p>Tuesday: US
ECI, US Consumer Confidence.</p><p>Wednesday:
ISM Manufacturing PMI, US JOLTs Job Openings, FOMC Policy Decision.</p><p>Thursday: BoE
Policy Decision, ECB Policy Decision, US Jobless Claims.</p><p>Friday: US
NFP, ISM Services PMI. </p><p>If the last
week was a pretty dull one with lack of big catalysts and a choppy price action,
this one is going to be the complete opposite. We will have the FOMC and other major
central bank policy decisions and lots of economic reports that the market is
particularly focused on.</p><p>The
„soft landing“ narrative is dominating the scene at the moment with
moderation in inflation and the resilience in the labour market. This has led
to an easing in financial conditions.</p><p>I think the
labour market data is more important now to the market given that the Fed has
complained many times about the “extremely tight” labour market. We’ve finally
been seeing disinflation in the past few months and the market has rallied on
that, but the labour market data has consistently beat expectations. </p><p>This is
something that should keep the Fed on its track to hike to their projected
terminal rate because from a risk management perspective they can’t risk
another spike in inflation given the tightness in the labour market, the easing
in financial conditions and the China reopening. </p><p>Tuesday: The
Employment Cost Index (ECI) is expected at 1.1% for Q4, down from the 1.2% of
Q3. Wage inflation is something the Fed and the markets are keeping an eye on
for the risk of a wage price spiral, but in the past months this risk subsided
as data showed a moderation in wage growth. </p><p>Since the
labour market is what in my opinion the market is more focused on now, I would
look at the US Consumer Confidence Present Situation Index, which correlates
with the unemployment rate, and generally foreshadows changes in employment by
a couple of months. </p><p>Wednesday: The ISM
Manufacturing PMI is expected to slip to 48.0 from the prior 48.4. The
employment and prices paid sub-indexes will also be important to watch, with
the former carrying more weight now for me. This is also why the US JOLTs Job
Openings should also be market moving in case of a notable fall in the data. </p><p>The FOMC is
expected to hike by 25 bps bringing the FFR to 4.50-4.75%. This move has been
well telegraphed in the past weeks by further moderation in inflation and Fed
members leaning on the smaller increase. In fact, the market is pricing a 98.4%
chance of the Fed raising rates by 25 bps. The Fed generally follows market
pricing, so it’s very unlikely to see them surprising with a 50 bps hike. I can
see them raising by 50 bps only if they wanted to break the current “animal
spirits” that made financial conditions to ease quite strongly in the recent
months. Such a move would certainly trigger a big risk off across the board. </p><p>I would also
add that the market is underestimating a lot the Fed’s resolve of hiking to
their projected terminal rate and stay there for a while. Their projections saw
a 5.1% terminal rate with 4.6% unemployment rate in 2023. This means that they
would be comfortable to not only hiking to their projected rate but also stay
there for longer as long as the unemployment rate stays below 4.6%. The current
unemployment rate is 3.5%. </p><p>Thursday: The BoE is
expected to hike by 50 bps bringing the Bank Rate to 4%. We will likely see
dissent again within the MPC with Tenreyro and Mann probably voting for
unchanged. The market expects further 25 bps hikes at the next meetings with
the terminal rate seen at 4.50%.</p><p>The ECB is
expected to hike by 50 bps bringing the deposit rate to 2.50%. The ECB members
and especially President Lagarde have been showing a more resolute and
aggressive stance on their tightening in recent months with calls of multiple
50 bps hikes. A recent report from Bloomberg though citing “ECB Sources” (which
are generally right) suggested that policymakers are beginning to consider a
step down to a 25 bps pace from March onwards. However, in recent speeches ECB
members leaned against such a report. The ECB is also expected to start QT in
March 2023.</p><p>The US
Jobless Claims is expected to show an increase to 200K from the prior 186K and
unchanged for the Continuing Claims at 1675K. Jobless Claims reports have been
consistently showing strength. A big miss should catch the market’s attention. </p><p>Friday: The NFP
report is expected to show 185K jobs added, down from the prior 223K. The rate
of jobs growth has been moderating month after months, but the labour market
remains extremely tight. The unemployment rate is seen at 3.6%, up from the
prior 3.5%. Average Hourly Earnings are seen moderating again with the Y/Y
reading expected at 4.3%, down from the prior 4.6% and the M/M figure to remain
unchanged at 0.3%. </p><p>The ISM
Services PMI is expected to return in expansionary territory at 50.3 after a
surprisingly big dive to 49.6 in the prior report. Another miss should be bad for
risk sentiment. </p><p>This article
was written by Giuseppe Dellamotta. </p>
This article was written by ForexLive at www.forexlive.com.