After last week was dominated by central bank meetings, policymaker’s guidance proved pivotal as most hiked rates as expected by money markets. The end result was a more hawkish bias despite inflation data for November generally surprising to the downside. The Fed’s dot plot indicated that 17 out of 19 FOMC officials wanted a Fed funds rate above 5% in 2023. Chair Powell said the labour market is still extremely tight and wage growth high. With the wage-sensitive components of the latest CPI data not really slowing down, it points to high rates being maintained for longer.

This theme eventually helped the dollar close near its high for the week with two days of gains on Thursday and Friday. In turn, US stocks fell for a second consecutive week as any good news about rising price pressures and inflation was overshadowed by grim forecasts of slowing economic growth and higher unemployment. The S&P 500 fell for four straight days as trendline resistance above 4,000, as well as the 200-day simple moving average capped any upside. A Santa rally may prove tough this year.

This week’s main event will be the final Bank of Japan meeting on Tuesday. Markets expect policymakers to stick to its outlier position as a central bank which is not in tightening mode, as inflation in Japan is largely an imported phenomenon. While prices have picked up to the highest in three decades, wage growth hasn’t, and the economy also contracted last quarter. More excitement could be on the horizon next year with Governor Kuroda recently opening the door to adjusting yield curve control. His term also expires in April so any sense that this seismic policy shift is nearing could be a pivotal moment for Japan and the yen.

Gold printed another weekly “doji” candle signaling indecision among buyers and sellers. The return of some dollar strength late on last week limited gains above $1820 with central bank hawkishness sounding the alarm on rates staying higher for longer globally. The precious metal continues to trade around its 200-day simple moving average at $1787. Direction into the new year will chiefly depend on expectations of a Fed pivot and possible lower rates in the second half of 2023.

Major risk events of the week

19 December 2022, Monday:

–IFO German Business Climate: Further improvements in the economic outlook are forecast after unexpected growth in the third quarter. Supply chain headwinds and the energy crisis with Russia have also eased, pointing potentially to a less severe recession. Pessimism regarding the coming months in Germany has reduced sharply with an improvement seen particularly in manufacturing.

20 December 2022, Tuesday:

– The Bank of Japan Meeting: The BoJ is set to keep ultra-low rates as policymakers want to wait for more clues on the wage and global outlook. The bank is expected to signal its resolve to hold off withdrawing stimulus. Inflation highs appears to be temporary with price gains outside food and energy remaining soft. Techincally, the euro made a new cycle high last week at 1.0736 and turned back lower. But a break of 1.0514 could signal the end of the November uptrend.

21 December 2022, Wednesday:

-US Consumer Confidence: Consumer sentiment slipped to a four-month low in November as high inflation and rising borrowing costs saw households less keen to spend on big-ticket items over the next six months, heightening the risks of a recession next year. But upbeat labour markets could limit the anticipated downturn going forward.

23 December 2022, Friday:

– US Durable Goods: The market median shows a drop of 0.8% after the October reading came in at 1.0%. That was the third straight month of rising orders. Analysts say unfinished work continues to pile up at factories as manufacturers struggle with supply chain issues. 

– US Core PCE Index: The core PCE deflator is seen at 0.2%, unchanged from the October print. Close attention will be paid to the Fed’s favoured gauge of inflation as the monetary policy tightening pace begins to slow. The FOMC tracks the PCE price indexes for its 2% inflation target.