Asia markets are expected to remain volatile this week ahead of the FOMC meeting, while investors are digesting the impact of the Russia-Ukraine war. Rising commodity prices, flaring inflation, geopolitical tensions, and central banks’ hawkish policy guidance have put risky assets on the fringe, with the S&P 500 falling for the second consecutive week and the Dow Jones Industrial Average falling for the fifth consecutive week.
Key instruments to be watched
US dollar strengthened further against the other major currencies last week due to rising bond yields, falling Euro dollar and weakening commodity currencies. USD becomes a risk haven currency on the back of ongoing geopolitical unrest and the Fed’s hawkish policy guidance. The US dollar index rose to above the 99-mark, up 3% since the Russia-Ukraine war started, and a 6% lift since October 2021 when the Fed signaled it would accelerate tightening monetary policy.
Energy, raw materials, and agriculture products have spiked on undersupply concerns in the wake of the US and its allies’ sanctions on Russia. The crude oil price surged 18% since February and gold was up 11% for the same timeframe.
The geopolitical uncertainty remains despite a sharp price pullback in some commodity markets last week. The rising cost of general consumer products, such as fuel and food, could hold back spending, dragging on global economic growth and leading to stagflation.
Key economic data and events for the week ahead
FOMC meeting, US PPI, and retail sales
The FOMC meeting decides on monetary policy with an announcement due to AEDT early on Thursday. Earlier this month, Federal Reserve Chair Jerome Powell indicated to increase the fund rate by a quarter percent, to 0.5% in the upcoming policy meeting and more if needed but didn’t give any clues for the timeframe of balance sheet reduction. The futures markets have priced in 6 x 25 basis points hikes this year to 1.7% as inflation continues to flare. The US February Consumer Price Index was at 7.9%, a fresh 40-year high. However, a faster pace in rate hikes could hurt credit sectors and cause systematic risks, given a flattening bond yield curve. Also, investors will need to closely watch the future guidance for the timeframe and size of the balance sheet unwinding.
On Wednesday, a slew of US economic data, including the February Producer Price Index and retail sales are also to be released, all key factors to gauge how the economy performs.
New Zealand GDP
According to Thomson Reuters, New Zealand’s December Gross Domestic Production growth will be at 3.3% QoQ and 5.8% YoY, indicating a solid recovery from the third quarter when the economy had a downfall due to the hardest lockdown to contain Covid.
According to consensus, Australia had another strong growth in labor markets in February, which is forecast at 40,000 new jobs and the unemployment rate to drop to 4.1% from 4.2% the previous month.
The Bank of England is expected to raise interest rates by 25 basis points, to 0.75% this week. The central bank has been gradually lifting the interest rates since November last year to curb rising inflation.
There are no policy changes expected for the Bank of Japan, with inflation staying relatively low and moderating wage growth.
CMC Markets’ Chief Analyst Michael Hewson provides the Week Ahead details for UK and Europe including:
- UK earnings and unemployment data
- Earnings reports from Ocado, JD Wetherspoon
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