It may be a challenging day with the US inflation data looming, but I will start with this: JP Morgan research says that ‘2022 will be the year of a FULL global recovery, an end of the global pandemic, and a return to normal conditions we had prior to the Covid-19 outbreak’. That’s optimistic! It sounds like the end of a fairy tale where they lived happily ever after, married, and had plenty of children. But the chances are, we will see the new strains, though less deadly, continue weighing on the economic recovery and the central banks will have a less extensive set of options to deal with it.
The major event of the week is today’s US inflation data. Consolidation and profit-taking are in play across the US markets. The Dow Jones ended Thursday’s session flat, but the S&P500 lost 0.72% and Nasdaq dropped 1.71%.
Plus, the mood in Asian session was sourish, as Evergrande has officially been labeled as a defaulter. The news came as no shocker and the losses in the Asian session were moderate. Investors expect the People’s Bank of China to take all precautions to avoid a broader shockwave to other sectors. And a monetary boost from the PBoC is soothing news given that the Fed will not come with Xmas gifts when it meets next week: the expectation is the announcement of a faster QE taper to tame the rising inflation. But how fast the US will get the QE program done will depend on how bad the inflation got.
Inflation is the new NFP
Today’s data is important, as the US inflation data is the new NFP. It is what will influence the Fed expectations for the next couple of months.
The US consumer inflation may have accelerated to 6.7% last month. If this is the case, it would be the highest level since the beginning of the ‘80s. And given that the recovery in the US labour market has progressed well with the latest unemployment rate showing an improvement to 4.2%, the Fed will do what it’s got to do to deal with the rising US inflation: tighten the policy.
Nonetheless, it feels like the inflationary pressures are now approaching a cycle peak, and that there is a chance that we see a softer than expected number as soon as at today’s read. If nothing, US crude tank almost 30% last month.
If we see softer-than-expected inflation data, the equity markets should close the week in quite a cheerful mood. If, however, we see a stronger number, than the Fed hawks will have little pity, and the early-week gains could melt like snow in the sun.
