Global stocks fell on Monday as investors braced for the last round of transatlantic interest rate hikes this year from a trio of central banks, hoping that a hitherto hefty pace of increases in borrowing costs will finally show signs of easing.
Oil prices rose as a key pipeline supplying the United States remained shut, while Russian President Vladimir Putin threatened to cut production in retaliation for a Western price cap on its exports.
The dollar rose against the Japanese yen but eased against a basket of currencies after data on Friday showed U.S. producer prices had risen more than expected last month, pointing to persistent inflationary pressures, ahead of key U.S. consumer price index for November on Tuesday, when a slowdown in core annual inflation is anticipated.
“A heavy event risk calendar this week stands to define the core themes for 2023,” ING bank said.
Market consensus was still “underappreciating” the risk of inflation staying higher longer, and “dangerously second-guessing” the Fed in terms of rate cuts in the second half of next year, ING said.
The MSCI all country stock index (.MIWD00000PUS) was down 0.3%, the benchmark having lost about 18% so far this year, wiping out all gains chalked up in 2021.
In Europe, the STOXX index (.STOXX) of 600 companies was down 0.7%.
Economists expect the Federal Reserve on Wednesday, and the European Central Bank and Bank of England on Thursday to all raise rates by 50 basis points, still a slowing down from the 75 basis point hikes seen in recent meetings.
Patrick Spencer, vice chair of equities at Baird investment bank, said central banks will start taking a less aggressive stance this week, though Tuesday’s CPI data will be critical.
“It’s the last important week of the year, after this week you’ve got no real sort of catalysts. If the CPI is a muted number, we’re off to the races and we’ll get our year-end rally,” Spencer said.
But irrespective of the CPI, deflationary pressures are increasing, with crude oil prices down for the year, and iron ore, lumber and house prices also down, Spencer said.
“All this talk of recession, I think it is certainly in the price, it’s in the markets. The key about recession is generally employment, and I think employment is going to be stronger than people give it credit, ” Spencer said.
Both the S&P 500 futures and Nasdaq futures were little changed.
In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) slumped 1.2%, erasing almost all of the previous week’s gains stemming from optimism that China is finally opening up its economy with the dismantling of its zero-COVID policy.
Japan’s Nikkei (.N225) eased 0.2%.
Chinese bluechips (.CSI300) dropped 1.1%, while Hong Kong’s Hang Seng index (.HSI) was down 2.2%, as investors’ focus shifted away from crippling COVID-19 curbs to the surge in infections that is now disrupting the economy.
While the Fed is widely expected to raise rates by 50 basis points on Wednesday at its last meeting of 2022, though focus will also be on the central bank’s updated economic projections and Fed Chair Jerome Powell’s press conference.
“We also want to understand if Jay Powell opens the door to a slowdown to a 25bp hiking pace from February – again, while in line with market pricing, this could be taken that we’re closer to the end of the hiking cycle and is a modest USD negative,” said Chris Weston, head of research at Pepperstone.
Kevin Cummins, chief U.S. economist at NatWest, said any surprise in the November CPI report was unlikely to shift the Fed from a 50-basis-point rate hike, although it would play a bigger role in the policy statement and the tone of Powell’s press conference.
In currency markets, the U.S. dollar eased 0.143% to 104.89, although it was not too far away from the five-month trough of 104.1 a week ago.
Sterling was flat at $1.2259, while the Australian dollar also slipped 0.3% to $0.6745.
Treasury yields held largely steady on Monday. The yield on benchmark 10-year Treasury notes eased to 3.5433%, compared with its U.S. close of 3.5670%. The two-year yield touched 4.3294%, down slightly from its U.S. close of 4.330%.
Brent crude futures were off 0.4% at $75.77 a barrel while U.S. West Texas Intermediate crude was at $70.84 a barrel, off 0.3%.
Spot gold was 0.4% lower at $1,790 per ounce.