(Reuters) – Shaky U.S. stock markets could get another curveball in the form of U.S. inflation data while across the pond, markets wait to see if British Prime Minister Boris Johnson manages to bolster its support after a series of scandals.
In China, the Winter Olympics begin with a demonstration of close ties between Moscow and Beijing.
Here’s to your week ahead at the markets of Lewis Krauskopf in New York, Vidya Ranganathan in Singapore, Swati Bhat in New Delhi, and Dhara Ranasinghe and Karin Strohecker in London.
Fears of a hawkish Federal Reserve have led to a rocky start to 2022 for US equities – Thursday’s inflation data could show worries are fully justified.
The US consumer price index for January is expected to rise 0.4%, according to a Reuters poll. That’s after December’s 0.5%, culminating in the biggest annual rise in nearly four decades.
Given that Fed Chairman Jerome Powell has pledged a sustained battle to control inflation, the US central bank appears on track to raise interest rates in March. Analysts increase call rate; BofA, for example, expects seven 25 basis point hikes this year.
How inflation affects U.S. corporate earnings will also be front and center as more fourth-quarter reports arrive, including from Coca-Cola and Pfizer. GRAPH: US Consumer Price Inflation, https://fingfx.thomsonreuters.com/gfx/mkt/akpeznoqdvr/Pasted%20image%201643844981321.png
2/ HOT HOT HOT
The Bank of England now estimates that the UK inflation rate could exceed 7%, well above previous forecasts. No wonder nearly half of its policymakers wanted a higher increase than the 25 basis point hike they agreed on.
As the cost of living crisis is a political issue, the government has put in place a series of financial support programs to mitigate the effects of rising energy prices.
Industrial production data for December and an estimate of fourth-quarter GDP on Friday should give some idea of how the economy is holding up.
To complicate the picture, it is a political crisis. Prime Minister Boris Johnson is facing anger over a series of missteps including booze-fueled parties in Downing Street during coronavirus lockdowns. The next few days could bring more clarity on his future. GRAPH: UK consumer confidence lowest since Feb 2021, https://fingfx.thomsonreuters.com/gfx/mkt/zdvxoaxwjpx/GBTHEME.PNG
3/ “SIMPLE, SAFE AND MAGNIFICENT”
This is Chinese President Xi Jinping’s promise for the Beijing Olympics. He could well have been referring to the yuan, the only currency that has outperformed against a dynamic dollar this year.
As China returns from a week-long Lunar New Year break, markets want to know if this outperformance can continue amid growing currency divergence between the world’s two major economies. January was the strongest month for the yuan since 2017, but the Chinese New Year often heralds a reversal.
Yet other factors are at play: high commodity prices, headwinds to contain Omicron, and strong foreign inflows into domestic bonds – all positive for China’s trade surplus. And Russian President Vladimir Putin is in China for the Olympics, signing more than 15 deals with Beijing. Both countries want a common financial infrastructure to protect against sanctions from other countries. It probably requires a strong yuan. GRAPH: Robust growth in Chinese exports, yuan firm, https://fingfx.thomsonreuters.com/gfx/mkt/myvmnnxzzpr/20210827-exportsyuan.png
4/ INDIAN DOVES TO ESCAPE?
India’s inflation-targeting monetary policy committee has repeatedly said it will continue to support growth until the economic recovery takes firm root. But the recent budget may force a rethink.
Persistent inflation and improving confidence in growth prospects could pave the way for a key rate hike in the next fiscal year.
The Reserve Bank of India could launch changes on its Wednesday, possibly raising its borrowing rate to reduce the corridor with the lending rate. Investors will also listen to the RBI’s views on the budget and how it could help markets absorb a record 14.95 trillion rupees ($200 billion) in borrowing. GRAPH: Retail inflation since Modi came to power in India, https://graphics.Reuters.com/INDIA-INFLATION/INDIA/zdpxoqmqyvx/chart.png
5/ STICKY OIL
After a month of simmering geopolitical tensions and a 15% oil price spike, OPEC and its allies took a record 16 minutes to decide that they would stick to previously planned production increases after all. .
Crude prices hit roughly seven-year highs above $90 a barrel on fears of supply disruptions from a host of geopolitical flare-ups, most notably a possible Russian-Ukrainian conflict. Europe is scrambling for alternatives to Russian gas, while winter storms in the US, at a time of general undersupply, pose an additional problem.
Energy prices also risk becoming a political hot potato for governments. Having already contributed to record inflation, further price gains are likely to slow the growth momentum. GRAPHIC: Brent crude on a tear, https://fingfx.thomsonreuters.com/gfx/mkt/xmvjojbbopr/Brent%20crude%20on%20a%20tear.PNG
(Compiled by Karin Strohecker; Editing by Kim Coghill)