The world had just seen the biggest fiscal and central bank recovery package in history after the Covid-19 pandemic – and was about to digest it – when the energy shortages as a result Russia’s invasion of Ukraine sent prices to dizzying heights. Eurozone inflation peaked at above 10% in November and it seemed that the world economy would slide straight into recession. While prices have started to decline moderately, they’re still nowhere near any economically reasonable level. So, the question remains whether a recession is inevitable. If it is, how severe will it be and is there anything retail investors can do to protect themselves? We asked Martina Hoffard from Spectrum Markets, for her opinion.   Martina, the European Central Bank (ECB) raised rates four times in 2022 and is obviously committed to follow its set course in 2023…  Yes, the ECB raised rates by 0.5 percentage points in July which was the first 50 basis points hike in eleven years. Shortly after, in September and November, interest rate hikes of 0.75 percentage points followed. In December, they were raised by a further 50 basis points. The September and November steps were totally unprecedented. We saw the ECB cutting rates by 1.0 percentage points at the beginning of the global financial crisis in 2008, but until 2022 it had never raised rates by more than 0.5 percentage points. There has been a lot of criticism regarding the late start of the central bank’s interventions. However, one must bear in mind the exceptional economic circumstances that left central banks across the globe caught in a dilemma – having to apply quantitative tightening and quantitative easing at the same time. It’s not just about the impacts on the currency or market volatility, it’s about preventing unwanted consequences on refinancing markets and the economy as a whole. While there may be broad consensus about the determinants of monetary policy action, this is not always true for its timing or the intensity.   What would be the reason for becoming divided over rate hikes if prices remain where they are?  One of the critical and maybe less appreciated goals of a central bank in times of rising prices is to not just to introduce quantitative tightening as a measure to relieve pressure on prices, but also to manage people’s inflation expectations. In other words, they want to avoid a de-anchoring of inflation expectations. ‘Anchored’ in the context of inflation expectations is a term used by central banks to describe a state where people expect long-term inflation to remain relatively unchanged even if prices temporarily rise beyond their short-term inflation expectations. Accordingly, expectations are de-anchored when people’s long-term inflation expectations go up considerably as a result of prices rising beyond their short-term expectations only temporarily. There was a longer period over which central banks didn’t react to high inflation. They then started rate hikes in summer and now for them it is important that they keep the credibility of their open market operations to show an impact. If they fail by under-tightening, the cost of fighting inflation will become even higher – an effect better known as wage-price-spiral.  And what about the risk of over-tightening?   This would be equally detrimental to the credibility of the ECB as it would incur significant economic burden. Hence, it has to find the right balance avoiding both a too weak a stance on inflation and a too aggressive an increase in the cost of money. This is even more sensitive due to the fact that European economies are each exposed to factors putting pressure on prices in a different manner. Italy, for example, whose economy developed better than those of the other major European countries at the beginning of the year, is greatly dependent on Russian gas. The same is true for Germany which has been a huge consumer of Russian gas and oil. Energy supply shortages will weigh on industrial output. France and Spain, for example, are better off in terms of energy independence. France has a strong nuclear power sector which it kept despite the security discussions around this energy source. Spain has been importing shipped liquid gas making it less vulnerable to the current supply shortages. Its consumer price inflation was at 5.7% year-on-year in December – I think this is illustrative of the dominant impact of the costs of energy. Then there are different structural issues across countries within and outside the European Union, such as in the United Kingdom which faces challenges resulting from Brexit. And the same heterogeneity in terms of exposure to the effects of rate hikes is applicable worldwide with a demarcation line between developed and emerging markets. So, from a monetary policy point of view, I would deem the current situation even more challenging than at the peak of the Covid-19-pandemic.  For the ECB?  For the...

Investors have a full plate this week that includes the US Federal Reserve's latest policy decision and a slew of big-name corporate earnings. Wall Street widely expects the Fed to deliver a 25-basis point interest rate hike at the end of its two-day policy meeting on January 31-February 1 (Tuesday-Wednesday). Economy This expectation was further cemented on Friday by another monthly decline in the PCE Prices Index. The headline rate for December slowed to a year-over-year rate of +5.0% from +5.5% in November while the "core" rate (excludes food and energy) came in at +4.4% versus +4.7% previously. This marked the third straight monthly slowdown in the "core" rate, which is one of the Fed's preferred inflation gauges. The rate is still more than double the Fed's preferred inflation rate of +2% but it has also slowed from +5.2% as recently as September 2022 and is now the slowest pace since October 2021. Bulls believe the latest PCE slowdown, combined with other data showing slower economic growth and a pullback in both corporate hiring and consumer spending justify a policy adjustment by the Fed. Expectations Many bulls are hoping the Fed on Wednesday will signal one final 25-basis point interest rate hike at the March 21-22 meeting before pausing in order to let the tighter financial conditions filter through the system. Bears doubt the Fed is ready pause just yet considering how tight the labor market remains and the fact that inflation is still too high. The employment picture has moderated in recent months but demand for workers remains high. We will get an update on the labor market on Wednesday from the Job Openings and Labor Turnover Survey (JOLTS). The survey for November showed US employers had 10.46 million open jobs, down only slightly from October. The January jobs report isn't due out until Friday, after the Fed's policy meeting. December's data showed the labor market added a healthy +223,000 jobs. Data to watch The only data today is the Dallas Fed Manufacturing Survey. Turning to earnings, big tech is in the spotlight this week with Meta reporting on Wednesday, followed by Google-parent company Alphabet, Amazon, and Apple on Thursday. In total, over 100 S&P 500 companies are scheduled to report Q4 results this week. Today's highlights are Canon, Franklin Resources, GE HealthCare Technologies, NXP Semiconductors, and Whirlpool. Oil market Traders this week are also braced for potential volatility in oil and other energy markets ahead of two key events. On Wednesday, February 1, the OPEC+ Joint Ministerial Monitoring Committee (JMMC) is scheduled to meet. The JMMC does not have authority to set production targets or other policy but they do wield a lot of influence over those decision. JMMC officials have stressed that they will not be making any recommendations at this meeting but OPEC energy ministers often make comments to the press on the sidelines that can provide clues as to how the officials might be leaning. Many oil insiders believe OPEC needs to lift production in order to meet expected China demand as the world's biggest oil consumer rebounds from Covid. A little further out on February 5, a ban by the EU on seaborne imports of Russian refined oil products - which includes diesel - will go into effect. It is also working with the G-7 to impose a price cap for countries outside the G-7. Some oil insiders are concerned the EU ban will put further strain on tight global diesel supplies and possibly send prices rocketing higher. In the US, distillate stockpiles, which include diesel, are -20% below the five-year average, according to the latest US Energy Information Administration inventory report. However, some insiders believe new refining capacity coming online in the Middle East will be able to fill the gaps left by Russia.

US stocks are selling off in what will be a massive week of corporate earnings, three major central bank rate decisions (FOMC,ECB, and BOE), and an employment report that should keep wage pressures alive. The January rally has hit a wall and probably won’t have a chance of returning until we get beyond Wednesday’s Fed press conference and Apple’s results after the Thursday close.  Spain Treasury yields are rising after Spanish inflation unexpectedly surged, delivering its first acceleration with the annual pace in six months. For the most part, disinflation trends have been firmly in place across the US and Europe, so Spain’s hot inflation report is a big red flag that the rest of the eurozone might show inflation is already proving to be stickier than what the market was expecting.  ECB hawks won’t have trouble pushing for a half-point rate rise this week.  If inflation pressures for the region remain elevated over the next two months, the ECB will need to remain aggressive at the March meeting.  Germany Germany’s preliminary GDP reading for the fourth quarter was very disappointing and suggests Europe’s largest economy is technical recession bound this quarter. The outlook is darkening quickly as the economy gets hit with higher energy prices, weakening demand, and rising inflation trends. Oil Crude prices are declining as the risks to the global outlook become overwhelming; ​ ​ China’s economy isn’t roaring back, global recession fears are returning after inflation unexpectedly rose in Spain, and as investors remain cautious ahead of a busy week of central bank decisions and peak earnings season.  Oil is pulling back here as the vibe on Wall Street is to be ready to de-risk later this week.  Growth prospects are weakening here and that should not do any favors for an already weakening short-term crude demand outlook.  In addition to the Fed, earnings and a jobs report, energy traders will pay close attention to an OPEC+ meeting that could see output remain steady.  President Putin had a phone call with the Crown Prince, which some are viewing as positive that the group is in agreement with the path on output.  WTI crude may edge lower but should have support well ahead of this month’s low. Gold Gold prices are weakening as global bond yields rally after a hot inflation from Madrid reminded investors that maybe they were too quick in declaring the inflation fight is nearly over.  Gold’s main kryptonite is if the Fed can’t control inflation and they need to tighten much more than markets are expecting.  Gold could enter the ‘danger zone’ if we get a couple more hotter-than-expected inflation reports and a robust NFP report that suggests wage pressures will be here for a while. Disinflation trends still remain in the US but any shock CPI report could disrupt the very bullish outlook that has been building up for bullion.  Crypto Inflation risks are quickly cooling what was a rather impressive month for crypto.  Bitcoin is declining as Wall Street becomes very defensive ahead of this week’s major risk events. The Fed is poised to downshift its tightening pace again, but they could argue that they will keep rates higher for longer and not cave at the first chance to cut rates.  For crypto to have any underlying support given all the regulatory and contagion fears, inflation risks need to go away.  Bitcoin has massive resistance at the $24,000 level, so if risk aversion remains in place, downward momentum might not find major support until the $21,000 region.  ​

Most currencies look stable. Dollar Index and Euro are ranged within 101-103 and 1.08-1.09 region. Pound can trade within 1.22-1.25 while EURJPY can trade within 143-140. USDJPY can limit its downside to 129 while upside can be capped at 130/131. Aussie is bearish below 0.72/0.7150. USDRUB has dipped within the 68-70 region. USDINR can trade within 81.40-81.80 while EURINR can be bearish while below 89. The US Treasury sustains higher but needs to get a strong follow-through rise from here to avoid a fall again. The German yields look bullish in the short-term while they continue to sustain above their support. The 10Yr GoI has room to rise further while the resistances can cap the upside on the 5Yr GoI and keep it pressured to fall again. Dow sustains higher and remains bullish. DAX is bullish while above the support at 15000. Nikkei lacks momentum to rise above 27500 but has scope to target further upside while above the support at 27200. Shanghai is coming off sharply from a high of 3310 but has immediate support at the current level. Nifty downside could be limited to 17500-17400. Commodities remains ranged. Brent and WTI may remain sideways within $90-85 and $82.50-77.50 respectively. Gold, Silver and Copper may continue to trade sideways while below the resistance at 1950, 24.50 and 4.3 respectively. Visit KSHITIJ official site to download the full analysis

While the entire global investment community is apparently very excited about the US Federal Reserve slowing its rate increases to 25 point increments, there are strong reasons for arguing why another 50 point rate hike, or two, are still on the Fed menu. It was all about last week’s data of course, and while inflation has mostly slowed, it will not go un-noticed by the Fed that the PCE Core Inflator actually rose last month! Adding fuel to the argumentfor the Fed maintaining its 50 point approach for at least another meeting. GDP slowed, but not as badly as feared, and Durable Goods data leapt higher for the month. While the market has been celebrating weak economic data as a force to generate slower rate hikes, the data may in fact not have been weak enough? Chairman Powell has reiterated time and time again that demand needs to be drastically reduced and he is not afraid of economic pain. In fact, quietly, he sees this as the solution. If the run of data is not weak enough, there is no solution, and therefore rates have to continue going higher. One aspect of the economy the Chairman has repeatedly singled out is employment. Employment must be slowed and weakened. Yet, all employment data released last week suggested an on-going strong environment. So we have an economy, that in the Fed’s perceptions, is most likely not in trouble, where core inflation actually rose last month, with pipeline price pressures still to come, particularly in services and shelter, and rising global oil prices again threatening US gasoline price re-inflation? This does not a happy, even complacent Fed make. Tactically, if they were to reduce rates to 25 points at this meeting, only to have revert to 50 points again later, this would represent a fatal blow to an already tarnished Fed reputation after the ’transitory’ fiasco. Which even we were able to recognise in real time was a disastrous miscalculation. With underlying price pressures remaining persistent, an economy still going reasonably in Q4, and the continuation of a very strong labor market, the Fed may well ascertain that it is indeed close to reducing its actions in the fight against inflation, but the job is far from done. Hence, the big risk to markets this week, is that sentiment has failed to appreciate just how historic a fight this is, and that the Fed must win this fight, even at risk of over-doing it. Should the Fed hike by 50 points, then risk-off responses would quickly follow. Having enjoyed a lengthy rally, stocks could be badly exposed. The favoured market view of 25 points is a possibility. Though a much smaller one that people think. Should it occur however, markets will most certainly celebrate this fact. With everyone who wants to be long, now further enthused and leveraged long after mis-reading last week’s tea leaves as all positive, it may yet be a case of ‘buy the rumour, sell the fact”. On either outcome, there is potential for stocks to correct, or begin to correct by the end of this week. The steadfast forecast here, is the Fed shows the market who is boss and hikes by 50.

The focus this week is the Federal Reserve meeting, the Bank of England rate decision and Monetary Policy Report and the ECB meeting. This troika of central bank decisions could set the tone for the rest of the year: the Federal Reserve passing the baton of global leader when it comes to tightening monetary policy. The Fed is now expected to hike rates by 25 basis points, the market is convinced that the Fed will slow the pace of rate hikes further, CMC Fed watch is predicting a 98% chance of a 25 bp rate hike to 4.5% - 4.75% on Wednesday. The Bank of England decision will be closely watched to see if they hike by 25bps or by 50bps, while the ECB is expected to continue with super-size hikes and raise rates by 50bps.  The Fed passes the baton to the ECB and the BOJ  As the Federal Reserve is fading as the key driver in central bank policy, this is having a major impact on the FX market. The dollar is no longer king, after having a stunning ascent in 2022. Instead, the euro, yen and the pound are catching up after falling sharply last year; for example, since October last year, EUR/USD is up some 12%. The key driver of the future direction for forex is likely to be the ECB policy and the Bank of Japan. Added to this, falling commodity prices is improving the terms of trade story for these countries, which is also benefitting their currencies. What is interesting, is that the Eurozone current account has already bounced back into surplus, according to the latest official data. All that gas storage and the fall in energy prices has paid off. This should benefit the euro in the long term, and we expect to see the euro to remain in the ascendency for the first half of this year, especially vs. the USD.  Terms of Trade improvement in the UK: small, but stable  In contrast, while the UK is also likely to benefit from the falling energy prices, the benefits are coming in at a slower pace due to a few things: the lower gas storage capacity available in the UK, and the weak fiscal position of the UK due to persistent deficits and high interest spending costs. This means that the UK current account remains in deficit, even if it is moving to a more sustainable path. For example, the latest data from the ONS showed that the UK’s current account deficit reduced to £19.4bn or 3.1% of GDP in Q3 2022, see the chart below. We shall have to see if this improves further when the Q4 data is released later this year. An improvement in the Terms of Trade data for the UK, even if it is coming from a low base, is welcome, and could help sterling to hold its own in the coming months, even if we believe the euro will outperform, especially against the dollar. While the dollar continues to fade, we could see EUR/GBP and EUR/JPY remain range bound for the foreseeable. Source: ONS BOE to “upgrade” UK economic forecast  One of the key themes in the market coming into 2023, was the extremely bearish outlook for the UK and for the pound. This has not come to pass, and as we wait for the BOE meeting this week, we expect the Bank to change its forecasts for the UK economy and to now predict a shorter and shallower recession. Some analysts expect the length of the recession to fall from a whopping 8 quarters to 4 quarters of negative growth, and for the decline in the growth rate to be reduced from 2.9%, which was the BOE’s November forecast, to a 1.5% decline, as market-based interest rates fall, which should support consumption.  MPC: will the doves take charge?  It will be worth watching how the MPC votes at this meeting. In the November meeting, two members did not vote to raise interest rates. We expect the core group of MPC members to push through a 50bp rate hike on Thursday, however the decision is on a knife edge and there is still a chance that the MPC could deliver a 25bp rate hike. The market currently expects rates to rise to approx. 4.38% in August, before rates start to decline in Q4. The market is currently pricing in 22 basis points of cuts through to the end of the year, on the back of weaker economic survey data at the start of this year. However, the market will be looking to see if Andrew Bailey will reinforce this view, or shoot it down, as the deceleration of price growth in the UK is not as fast as our peers. With inflation running at 10.5%, we think...