A deluge of 50bp hikes

Friday’s US PPI print was soft, but not soft enough to meet market expectations. The US producer prices in November rose 7.4% since a year ago, from 8% printed a month earlier, and more than 11% printed in summer. But still slightly higher than 7.2% that analysts predicted.

The kneejerk reaction was as expected. The US dollar spiked following the data, closed the week on a strong footage in America and opened the week on a strong footage in Asia. Trend and momentum indicators turned positive last week, and the dollar could gain more field before two important events that will mark the trading week: US November CPI on Wednesday, and the FOMC decision on Wednesday.

Another disappointment?

Looking at the expectations, inflation is expected to have slowed to 7.3% in November from 7.7% printed a month earlier. But because the consensus number is relatively low, we may have another Friday’s PPI-like disappointment at tomorrow’s US CPI release, which could further boost the Federal Reserve (Fed) hawks before Wednesday’s FOMC decision, fuel the US dollar, send the US yields higher and the stocks lower.

One good news about inflation, however, is that the 1-year inflation expectation unexpectedly declined to the lowest levels since September 2021. This is excellent news for the Fed, as inflation expectations are self-fulfilling, and have the power to bring inflation down just by changing the way people make their decisions.

But in reality, none of it will matter for the Fed’s policy decision this week.

Important note before the FOMC decision

There is a gap between what the Fed says it will do, and what the market thinks, and prices the Fed will do, even a tiny hawkish message could already weigh on the mood before Xmas.

For now, the pricing in the market matches a terminal Fed rate of less than 5%, while the dot plot is expected to reveal a higher median rate forecast for 2023 of around 5.125%. This means that there is room for a hawkish rectification in market pricing both in the US dollar, and in equities.

In the medium-run, while I believe that a hawkish correction should not change the dollar’s medium-term outlook - which is bearish, I think that the stock markets could take another dive, as the recession worries should keep appetite limited.

The S&P500 failed to clear an important ytd resistance last week, and slipped 3% during the course of the week. While Nasdaq tumbled 4%, having flirted with the 100-DMA the week before.

We shall see both indices extend losses this week.

Other than the Fed…

The European Central Bank (ECB), the Bank of England (BoE), the Swiss National Bank (SNB) and Norges Bank are all due to raise interest rates this Thursday.

In the Eurozone, the ECB will probably raise its policy rates by 50bp. But given that inflation advanced to double-digit numbers this year, we can’t really rule out the possibility of a third consecutive 75bp hike from the ECB.

The European policymakers are expected downgrade their growth forecasts, and upgrade their inflation projections. If that’s the case, a too-fast rate hike may not be ideal, and we shall end up with a 50bp hike, with the hint that the QT in Europe would start by March next year – which is an extra hawkish announcement.

The EURUSD recovered more than 11% since the end of September, thanks to a broadly softer US dollar, and we shall see the single currency aim for a stronger recovery. Although the direction in the short run could be blurred by the Fed decision, and the reaction to a probably hawkish decision.

Across the Channel, the Bank of England (Bo) is also expected to raise its rates by 50bp, to push the lending rate to 3.5%, the highest since 2008. Even though the BoE should keep raising rates to fight its double-digit inflation, the freefall in British home prices and the rapid slowdown in economic growth hint that the BoE cannot push too hard, either.

Cable rebounded almost 20% since the Liz Truss dip back in September, and could extend gains toward 1.30, not because the pound will do great thanks to a flourishing British economy, but because the US dollar is expected to depreciate in the coming months. And as it is the case for the euro, the short-term direction for sterling-dollar is unclear, as the US dollar’s move into and posterior to the Fed decision will determine the next short term direction in Cable.

Here in Switzerland, the National Bank is also expected to hike the policy rate by 50bp to 1%. Inflation in Switzerland has been much more moderated compared to Europe or to the US thanks to a strong franc. The dollar-franc lost more than 8% since end of December, and the pair should extend losses to 0.88-0.90 region.