Investors faced up to a shift in gears by central banks last week as central banks looked to tame rampant inflation.  The ECB set the groundwork for a tightening in monetary policy guidance at its next meeting, while several officials at the Bank of England voted for a stronger rate rise than many expected. Tightening monetary conditions will be a key driver for 2022 and this new era of rising interest rates and deteriorating liquidity is worrying many not used to these conditions.  

All eyes will be on the US inflation report released on Thursday. A multi-decade high print is expected above 7% for the headline rate. This will add to the pressure on the Fed to raise rates faster at its March meeting. The chances of a fifty-point rate hike doubled after Friday’s strong NFP data to just below 40%. Wage pressures are continuing to build with many policymakers already believing the economy is effectively at full employment and the labour market is very tight.

The dollar suffered its worst week since October 2020 but has been supported by the 100-day SMA and the late 2021/early 2022 uptrend. The question is whether all the good news has been priced into the greenback. That said, US 10-year Treasury yields hit cycle highs at 1.93% on Friday which should add some support in the near term.

It’s a quieter calendar, which is often the case after NFP, and this may help Wall Street and equity markets catch its breath. Following the worst day in almost a year last week, US stocks shrugged off the Meta plunge and posted their biggest weekly gains of 2022. There is more volatility around earnings than normal as the market frets about the Fed’s next moves.

Major risk events of the week

07 February 2022, Monday:

–German Industrial Production: Consensus forecast a more positive print after December’s decline. Supply chain issues remain a headwind, though strong domestic demand and an easing of coronavirus restrictions may boost the growth outlook going forward.

10 February 2022, Thursday:

-US CPI: Analysts expect January inflation to hold near 40-year highs at 7.2% for the headline print, and 5.9% for the core. Prices pressures are broad based and include a tight job market, shelter costs and wage growth. The extreme worker shortage caused by Omicron could see even higher prices in the next couple of releases.

11 February 2022, Friday:

-UK GDP: Growth is estimated to have fallen into negative territory for December, and this would translate into a quarterly gain above 1% and a full-year figure of more than 7%. The Omicron spread will have impacted on the recreation sector, but this is viewed as a temporary bump on the road to recovery.