Macro Insights: Pivotal week ahead with US CPI and Fed meeting on the radar

Even the middle of December doesn’t seem to be getting any quieter yet, and this week brings a host of Tier 1 economic data and a flurry of central bank meetings that can cause considerable volatility. In addition, we have the China reopening momentum extending further, and hopes of more stimulus measures especially for the property sector. Geopolitics is also taking another turn as Putin continues to threaten the use of nuclear and also risk of a production cut in crude oil is seen as a response from Russia to the G7 price cap that was set last week. It is unlikely that we will get a quiet end to the year.

The bigger focus for this week will still be the US CPI (scheduled for release on Tuesday 13 Dec at 9:30pm SGT), where investors are starting to get nervous about an upside surprise especially after Friday’s November PPI report that was above expectations broadly. The market reaction to that PPI report was erased quickly, but that may not be the case for CPI. We can expect a moderation this week on the back of easing supply chain pressures, stable gasoline prices and holiday discounts from retailers to clear inventories. However, the Cleveland Fed CPI model suggests upside risks vs. consensus expectations with a 7.5% Y/Y print for headline and 6.3% Y/Y for the core (vs. consensus of 7.3% Y/Y and 6.1% Y/Y respectively).

We believe the narrative really needs to shift from peak inflation to how low inflation can go and how fast it will reach there? Consensus expects 0.3% M/M for both the headline and the core – anything lower than that can cause the markets to rally but will also provoke the Fed to send in a stronger message the following day to convey its message of avoiding premature easing.

The Fed meeting next day (Thursday 15 Dec 3am SGT) is broadly expected to deliver a 50bps rate hike, which will mean cumulative hikes of 425bps this year. It is unlikely that the CPI print from a day before could change that. While this is a step down from the four consecutive 75bps rate hikes seen in the last few month, more important for the markets will be to watch for:

How high do the terminal rate expectations go?

Anything above 5% is still a bearish surprise for the markets, but the dot plot will have to show terminal rates to be in the 5.25-5.50% area to sound a hawkish alarm. If the dot plot signals a peak rate of 4.9%, it could signal to the markets that the Fed is starting to get worried about recession and may soon pause or pivot.

Is the decision unanimous?

Most of the Fed members recently have conveyed a very similar message. But any split votes, with the more hawkish members Bullard and Powell still preferring a 75bps rate hike, could be a hawkish surprise.

Inflation and GDP growth outlook

Any signs of upside risks to inflation from China’s reopening or easing financial conditions could be interpreted as hawkish. On the other hand, if the Fed talks about the lag effect of policy rate hikes, that will likely sound dovish. It will also be key to watch how Fed views the incoming data and its thoughts on recession concerns.

Powell’s press conference

How strong a pushback we get on 2023 rate cuts priced in by the markets. Could Powell open the door to a further step down to 25bps from February? Does he still see the risk of over-tightening to be less severe than the risks of under-tightening?

What to watch?

US Dollar

USD reversed sharply lower after the softer October CPI print, after a strong 5-month run from the greenback. The positioning is far more balanced now, with the biggest pullback risk seen in sterling which has been one of the biggest gainers (after the NZD) in the G-10 basket since the November 10 release. A more dovish turn by the markets could make EURUSD breach 1.06 resistance and bring 1.08 in focus, while USDJPY could break below the 200-dma at 135.16.

S&P500 and NASDAQ100

S&P500 failed to break above the trendline resistance around 4,100 earlier this month but broke below trendline support at 3,992 last week. Next key support level for S&P500 is at 3,906 before 3,900 comes into view. A dovish surprise could bring a break above 4,000 again. Meanwhile, bear trend for NASDAQ100 could resume if it closes below 11,450.