The week starts on a positive note, after the major US and European indices ended up last Friday on a good rebound. The S&P500 jumped almost 2%, as Nasdaq gained 1.80% to close a week which, however, saw the US inflation hit 9.1% and the producer prices advance past the 11% level, unexpectedly.
Investors remain focused on earnings this week, to determine which companies are in a better position to weather the difficult macroeconomic environment, and the rising interest rates.
Good news is that, the week starts with improved odds of seeing a 75bp hike at the next FOMC meeting, rather than a 100bp hike. The probability of a 75bp hike is back to 70%, up from around 20% following the scary inflation report that was released last week in the US.
The fact that the Federal Reserve (Fed) doves have been quick to make a comeback hints that the Fed expectations are hawkish enough, and that more hawkishness doesn’t see a sustainable market reaction.
The US dollar bounced lower from a fresh 20-year high on Friday and is softer against most majors this morning. This week, the dollar traders will be watching the US housing data and the Philly Fed manufacturing index, and good data will likely be bad news for the Fed watchers, as it would revive the odds of a 100bp hike at next Fed meeting.
Three important events in Europe
There are three important events to watch.
One, Mario Draghi will address lawmakers on Wednesday, when he’ll declare his intention to either give his coalition another chance or quit government.
If quits, we will see a further positive pressure in Italian bond yields, and a negative pressureon the euro. The latter will put the European Central Bank (ECB) in a challenging position to hike the interest rates to tame inflation
Second, the ECB is expected to raise the interest rates by 25bp at this Thursday’s meeting. No matter if Italy goes into turmoil or not, the ECB will have to hike rates this week, and say that they will do more if needed in the coming meetings. The market already prices in a 50bp hike at the ECB’s September meeting, therefore there is little hope for a more hawkish accompanying statement. The EURUSD’s only chance to avoid another attempt below parity is a softer US dollar.
And finally, we will get to know whether the Nordstream 1 pipeline will open or not. There is a lot of speculation that the pipeline, which was closed last week for maintenance, would be kept shut by the Russians as a retaliation to Western sanctions. Seeing the gas flow reestablish to Germany will give a sigh of relief to the European gas markets but won’t eliminate the risk that Russians could cut the European gas anytime.
Biden goes to Mid East
The barrel of US crude is flirting with $98 per barrel this morning, but the upside potential remains limited as 1. The recession talks and prospects of lower global demand tilt the balance in favour of the bears these days, and 2. Joe Biden visits Middle East this week to ask the oil producer countries to pump more oil to bring these prices lower, for God’s Sake!
