- Key upcoming central bank policy decisions include the Fed
- Despite recent good news, negative Omicron headlines could still hurt markets
Markets are likely to remain in some sort of holding pattern to start the trading week, ahead of updated information from the US Federal Reserve's policy meeting which ends on Wednesday. Though no rate hike is expected, there appears to be widespread consensus that, after Friday's inflation data release showed the largest annual gain for US CPI since 1982, the central bank will have to speed up its tightening efforts.
It all comes down to the language Fed Chair Jerome Powell will use to describe the Fed's next moves. That will likely determine the sustainability of the new highs hit by three of the four major US indices on Friday—the S&P 500, NASDAQ and Dow Jones.
If Powell sends a straightforward message that the central bank intends to accelerate the tightening process, expect sharp selloffs. However, if he provides a more dovish update, as he has done in the past, by saying the Fed is patient and will act slowly—whether or not that ends up being the case—investors will probably stay the course and lift equities yet higher.
Negative News On A Trio Of Fronts Could Still Pressure Markets
The S&P 500 reached a new record close to finish out the trading week not only despite the highest inflation in almost 40 years, but also after news that, despite surging case numbers of the Omicron variant in South Africa, "severe disease is limited."
Though rising inflation expectations appear to have already been baked into market expectations given the strong equity close, negative news on any one of three catalysts—near-four-decade high inflation, ongoing tightening, and any new Omicron surprises—could still prove to be cataclysmic for markets, acting as a trigger for renewed investor frenzy.
The Volatility Index (VIX) may have bottomed, signaling that investor nervousness may once again be on the rise.
A tricky theme retail investors tend to ignore is the influence of Treasuries on stocks. If investors continue to focus on monetary policy and shrug off Omicron, Treasury yields, including for the 10-year benchmark note, will likely rise, siphoning capital away from highly valuated equities. Conversely, if the latest COVID-19 strain proves to be more harmful than currently assumed, investors could dump equities and return to Treasuries in droves, thereby driving down their yields.
Still, investors remain skittish on both Omicron and the pace of Fed rate hikes. That's visible via the conflict on the 10Y daily chart. Investors are duking it out, keeping yields on the knife's edge over an H&S top in place since October. If the pattern completes, it could turn out to be the right shoulder of an H&S since February. If the larger pattern completes, it could force yields to retest their record lows, registered during the notorious March 2020 bottom.
The dollar dipped on Friday, in tandem with yields, because, as previously mentioned, inflation was already priced in.
The USD moved within a range that's formed a pennant, which is expected to provide an upside breakout and resume its underlying uptrend.
In the mirror image, gold rose.
The precious metal may develop either a rising flag (black parallel rising lines) or a pennant (converging red lines), suggesting a downside breakout will take the yellow metal lower.
Bitcoin started the week on the back foot, slipping for a second week and extending a decline to its fifth consecutive week, the longest losing streak for the digital currency since early 2018.
The number one cryptocurrency by market cap has fallen below its uptrend line for a third consecutive week, raising the odds of a continued decline. If the price falls below $29,000, the token will have completed the most oversized top in Bitcoin's history.
While BTC enthusiasts can't even consider such a scenario, after influencers and some analysts have talked about $100,000 and $1M per token, it's important to recall previous crashes. Though we're not saying Bitcoin may continue to soar, given its propensity to extreme volatility, it could just as well crash.
Oil gained on Friday. However, technically, the price of the commodity may be about to decline.
The 4-hour chart could be developing a down sloping H&S top. On the daily chart, above, WTI's pattern isn't keeping up with its highs, which could be setting up for a massive top.
The Week Ahead
All times listed are EST
Sunday
18:50: Japan – Tankan Large Manufacturers Index: forecast to notch up to 19 from 18.
18:50: Japan – Tankan Large Non-Manufacturers Index: expected to jump to 6 from 2.
Tuesday
2:00: UK – Average Earnings Index + Bonus: likely to drop to 4.5% from 5.8%.
2:00: UK – Claimant Count Change: previously printed at -14.9K.
8:30: US – PPI: seen to remain flat at 0.6%.
21:00: China – Industrial Production: anticipated to rise to 3.8% from 3.5%.
Wednesday
2:00: UK – CPI: probably climbed to 4.7% from 4.2%.
8:30: US – Core Retail Sales: estimated to decline to 1.0% from 1.7%.
8:30: US – Retail Sales: forecast to more than halve to 0.8% from 1.7%
10:30: US – Crude Oil Inventories: last week's reading came in at -0.240M.
14:00: US – FOMC Interest Rate Decision
19:30: Australia – Employment Change: predicted to print at 200.0K, a giant leap from -46.3K previously.
Thursday
3:30: Switzerland – SNB Interest Rate Decision: forecast to hold at -0.75%.
3:30: Germany – Manufacturing PMI: seen to edge lower, to 57.0 from 57.4.
4:30: UK – Manufacturing and Services PMI: previously printed at 58.1 and 58.5 respectively.
7:00: UK – BoE Interest Rate Decision: likely to hold rates at 0.10%.
7:45: Eurozone – ECB Interest Rate Decision: predicted to remain at 0.00%.
8:30: US – Building Permits: expected to edge higher to 1.660M from 1.653M.
8:30: US – Initial Jobless Claims: likely to rise to 195,000 from 184,000.
8:30: US – Philadelphia Fed Manufacturing Index: forecast to drop to 30.0 from 39.0.
21:30: Japan – BoJ Monetary Policy Statement
Friday
2:00: UK – Retail Sales: seen to have dipped to 0.5% from 0.8% MoM.
4:00: Germany – Ifo Business Climate Index: forecast to edge down to 95.4 from 96.5.
5:00: Eurozone – CPI: expected to remain flat at 4.90%
5:30: Russia – Interest Rate Decision: forecast to rise 50 basis points to 8.00%