Week of December 5

Markets got a boost mid-week after Fed Chair Powell implied a smaller rate hike at the next FOMC meeting. Some signs of relaxing covid measures in China contributed to the improved sentiment but the rising number of protests makes it a fluid situation. Now attention turns to trade balances in major economies and interest rate decisions in Australia and Canada.

------------------------------


The week in review

The week started with a focus on protests in China. In the following days, Chinese health authorities made a series of announcements broadly interpreted as signs that they would relax the more economically damaging aspects of the zero-covid policy. In response, Chinese stocks put in their best weekly performance in over a decade. The Hang Seng closed over 10% higher, and China's 50 and 300 indices 6% and 5.30% -respectively.

Wednesday saw a boost to risk sentiment on Jerome Powell's comments with the dollar falling 0.70% intraday. The Fed Chair mainly affirmed the tone given previously that rates would continue to rise and remain restrictive for some time. But, crucially he signalled that 50 bps would come instead of 75 bps in December. The dollar ended the week 1.56% lower, extending its massive decline across November. 

In the latter half of the week, US indices came down a bit as the euphoria died down but regardless, S&P 500, DJIA and Nasdaq all finished the week higher. Nasdaq was the best performer among the three as it rose 2%, whereas S&P 500 and DJIA ticked 1% and 0.30% higher.

European CPI came in below estimates, but core inflation showed resilience, backing the narrative of a more robust response from the ECB. EUR/USD advanced over 1% and above the $1.05 resistance on a weaker dollar. The pound was also up ~1.20%, recording a 4-week bullish streak despite slowing down after hitting a wall at $1.23.But the biggest FX winner was the yen, which rose nearly 3% against the plunging greenback, even more than gold's ~2.60% jump.

TOP EVENTS IN The week ahead

RBA & BOC meetings

Central banks will likely be the driving theme over the next couple of weeks, with almost all of the major institutions making decisions over that period. This week it's the RBA and BOC, both of which have started to moderate their rate hikes, and the consensus among economists is that they will raise by a quarter basis point. Traders might interpret the smaller rate hikes that similar action might come from the ECB, BOE and Fed, who all meet the week after. Australia also reports Q3 GDP after the RBA meeting, with quarterly growth expected to accelerate to 1.1%. 

Trade balance around the globe

Trade data could be the week's protagonist for the currency markets as investors evaluate the impact of Chinese lockdowns, growing inventory in US retailers, and the effects of higher interest rates on the expectation that there could be a recession. Note that US Q3 GDP rose broadly thanks to a significant drop in imports, as the cost of living hit Americans' pocketbooks. The US trade deficit is expected to shrink marginally to -$73.0B. 

Canada is expected to see a bounce in its trade surplus, aided by a significant drop in imports as exports are impacted by the lower price of crude. China's trade surplus is expected to shrink, with imports declining faster than exports. 

Other events and earnings

The Eurogroup will hold a meeting on Monday, and there is ISM non-manufacturing PMI from the US. Canada's Ivey PMI is on Tuesday. On Friday, the US reports PMIs and University of Michigan Consumer sentiment. 

Earnings expected during the week include SAIC, BHP, Autozone, Costco and Oracle.