It may have been a holiday-shortened week, but that didn't stop the markets from pushing higher. All three main indices on Wall Street are set to book gains for last week as the market continued to focus on the prospect of the Federal Reserve slowing the pace of rate hikes.
The November Federal Reserve meeting minutes revealed that policymakers agreed that it could soon be appropriate to start downshifting the pace of interest rate hikes, as they expressed concerns over the lag time between rate hikes and the impact on the real economy.
Weaker data also supports the idea of a less hawkish stance. US business activity weakened further in November as the composite PMI contracted for a fifth straight month, and new orders fell to the lowest level in 2.5 years.
In addition to the focus on the Fed, China’s COVID cases have also been under the spotlight. Infections have risen to a 6-month high, and concerns over lockdown restrictions keep the risk on mood in check.
Indices
Slower interest rate hikes are good news for businesses, consumers, and growth. As a result, stocks pushed higher, and risk sentiment improved. The S&P rose to its 200 DMA above 4000. The Nasdaq traded at a 10-day high, and the Dow Jones pushed up to a 5-month high.
In Europe, stock markets found support from the prospect of a more dovish Federal Reserve. Eurozone business activity contracted less than expected at 47.8, and German business sentiment improved.
Foreign Exchange
The US Dollar came under increasing pressure as expectations built that the Federal Reserve will slow rate hikes from December. The USD/JPY dropped to a 10-day low as Fed -BoJ divergence narrows.
GBP/USD outperformed its peers, rising over 1.8% across the week to a 3-month high, above 1.21. The rally in the pound is surprising given that the PMI data remained weak, and the OECD warned that the UK economy is expected to experience the worst downturn of any advanced economy.
Bitcoin
Bitcoin tumbled to a two-year low of $15,000 last week amid the ongoing fallout from FTX. Fear of contagion within the crypto space rose with more and more firms, such as BlockFi and Genesis, halting withdrawal. Such moves caused jitters around the crypto space and sparked more withdrawal requests and a domino effect. These concerns are even more real, given that the crypto space is unregulated. BTC/USD managed to recover from these lows, helped by the upbeat macroeconomic environment after the less hawkish minutes from the Federal Reserve meeting. Hopes of a less hawkish Fed have boosted risk sentiment and demand for riskier assets such as Bitcoin. Despite BTC/USD recapturing $16,000, the outlook could still be bearish. A break below $15,500 could open the door to $13,500.
Oil
Oil prices fell last week marking it the third straight week of losses. Oil prices have plunged 16% over the past three weeks. At the start of last week, a rumor that OPEC could raise oil production at the next OPEC meeting sent the oil price to a low of 75.30, which was last seen in January. Saudi Arabia quickly denied the rumor, and oil recovered those losses. However, gains were short-lived Concerns over slowing global growth and rising COVID cases in China continue to weigh on the oil demand outlook. Meanwhile, supply concerns are easing as the G7 Russian price oil cap being discussed is higher than current oil price levels, so it is not expected to hurt supply.
What to watch this week:
Wednesday Nov. 30
Eurozone Inflation
As measured by CPI, Eurozone inflation rose to a record 10.6% YoY in October and is forecast to cool to 10.2% YoY in November. With over half of the 19 countries in the eurozone experiencing double-digit inflation, ECB remains under pressure to keep raising rates. Some ECB officials have started talking about slowing the interest rate hike pace. Should CPI ease by more than expected, this could encourage more ECB policymakers to consider slowing hikes.
China manufacturing PMI
COVID infections in China have reached a six-month high and continue to rise. Worries are growing that more curbs will be applied. Manufacturing and retail sales data earlier in November underscored the economic impact that tighter restrictions were having. The Caixin manufacturing PMI is forecast to fall to 49 in November from 49.2 in October. The level 50 separates expansion from contraction.
Thursday Dec. 1
US Core PCE data
Core PCE is the Federal Reserve’s preferred measure for inflation, and the market will watch for more signs that inflation is easing. In October, CPI, core CPI, and PPI inflation measures cooled. However, core PCE is expected to tick higher to 5.2% YoY, up from 5.1%. A rise in inflation could cause the market to rein in hopes of a more dovish Federal Reserve.
Friday Dec. 2
Nonfarm payroll
The US labor market continues to show resilience despite high inflation and rising interest rates. After 261,000 jobs were created in October, expectations are for a further 200,000 to have been added in November. Unemployment, which rose by more than expected to 3.7%, is expected to continue rising to 3.8% in November. Meanwhile, average hourly earnings are expected to hold steady at 4.7%. A stronger-than-expected jobs market could see investors rein in dovish pivot bets.
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