Weekly economic and financial commentary

Wells Fargo Research Team Wells Fargo

Summary

United States: Not Through with 2021 Just Yet

Inflation is intensifying and consumer activity is cooling, data covering the month of December reveal. The Consumer Price Index (CPI) rose 7.0% year-over-year, the fastest increase in nearly 40 years. Similarly, the Producer Price Index (PPI) was up 9.7% over the year. Meanwhile, retail sales unexpectedly declined 1.9% in the final month of the year.
Elsewhere, the NFIB Small Business Optimism Index edged up to 98.9. Industrial production slipped 0.1%, as supply constraints held down manufacturing production. Consumer sentiment fell to 68.8 in January, the first solid sign that the Omicron surge is weighing on economic activity.
Next week: Housing Starts (Wednesday), Existing Home Sales (Thursday), Leading Index (Friday)

International: U.K. GDP Advances While Australian Retail Sales Surge

In the G10, U.K. November GDP rose an encouraging 0.9%, while Australia retail sales rose by 7.3% month-over-month in November, the largest gain since May 2020. In emerging markets, price pressures remain present in Brazil, as December CPI came in higher than expected at 10.06% year-over-year, still well above the Central Bank of Brazil's 3.5% target for 2022.
Next week: China GDP (Monday), U.K. CPI (Wednesday), Japan CPI (Friday)

Interest Rate Watch: When Will the Federal Reserve Shrink Its Balance Sheet, and by How Much?

The outlook for U.S. monetary policy has shifted significantly in recent months. With tighter monetary policy on the horizon, market attention has turned to possible reductions in the Fed's asset holdings, which total nearly $9 trillion at present, up from $4.2 trillion before the pandemic.

Credit Market Insights: Mortgage Rates Are on the Rise

According to Freddie Mac, the average rate on a 30-year fixed-rate mortgage jumped almost a quarter of a percent this week, rising to 3.45% from 3.22%—the highest level since the pandemic's onset in March 2020.

Topic of the Week: U.S. Dollar Stumbles to Start the Year

A hawkish shift from the Fed has not been enough to prevent the U.S. dollar from tumbling to start 2022. Following a year where the broad dollar index (DXY) rose close to 6.5%, in the first few weeks of this year the same index has dropped a little over 1%.

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Wells Fargo Research Team

Wells Fargo

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold climbs further, focus is back to 45,000

Gold regains upside traction and surpasses the $4,900 mark per troy ounce at the end of the week, shifting its attention to the critical $5,000 region. The move reflects a shift in risk sentiment, driving flows back towards traditional safe haven assets and supporting the yellow metal.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.