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  • Weekly Focus: U.S. Inflation, Central Bank Meetings and Numerous Data

Weekly Focus: U.S. Inflation, Central Bank Meetings and Numerous Data

Buckle up. The busiest week of the month has begun. The U.S. Consumer Price Index (CPI) for November will be released on Tuesday. The Federal Reserve (Fed) will have its meeting on Wednesday. The following day European Central Bank (ECB) and Bank of England (BoE) will also have their meetings.

A brief introduction suffices to approach the next five trading days with caution and attention. The stronger-than-expected U.S. labour market report last Friday has added an extra layer of caution, heightening the risks of a correction in the stock market. The American economy generated 199,000 new jobs outside the agricultural sector in November, surpassing the consensus of 180,000 and well above the ADP calculation of 103,000. The unemployment rate dropped to 3.7%, surprising investors who anticipated it to remain at 3.9%. Average hourly earnings increased by 0.4% last month, exceeding the consensus of 0.3%.

The reasons for this disappointment become evident when examining the change in Nonfarm Payrolls on a cross-sectional basis. The private sector created 150,000 new jobs against the forecasted 153,000, while the remaining 49,000 were added by the public sector. With this understanding, investors have slightly reduced their bets on Fed’s interest rate cuts in March, down to 42% from 43%. Conversely, they have propelled the S&P 500 broad market index to the March 2022 highs at 4611 points.

Determining the extent to which stronger employment and rising wages contributed to inflation in November is challenging, but it is undoubtedly a pro-inflation factor. However, crude prices experienced a significant decline last month, alleviating inflation pressures. Consensus expectations for inflation stand at 3.1% YoY, compared to 3.2% YoY in October. Some tension may arise from the Core CPI, which excludes volatile food and energy prices and could rise to 0.3% from 0.2%. Indeed, a lower unemployment level could make such contribution. So, investors have to be prepared for extra volatility on Tuesday. Any signs of accelerated inflation may prompt the Fed to issue a hawkish statement on Wednesday. While the Fed's Fund rates are highly likely to remain at 5.50%, the tone of Fed Chair Jerome Powell may lean towards the hawkish side. This combination of inflation data and the Fed meeting poses a significant threat to the markets. However, if inflation aligns with expectations, Powell may adopt a moderately hawkish tone, making it easier for investors to navigate without a major correction in the S&P 500 index.

The meetings of the ECB and BoE are comparatively more predictable and therefore less crucial. Christine Lagarde, the President of the ECB, is anticipated to signal an early dovish shift in monetary policy due to challenges facing the Eurozone economy. On the contrary, the Bank of England is expected to maintain its tight policy owing to high domestic pro-inflation risks.

Technically, the S&P 500 index is accommodating itself in a secure territory. The weekly resistance has moved to 4750 points. There are some risks of the decline of the index to the nearest support at 4540-4560 points this week. The second half of the week looks more optimistic though.

OPEC+ seems to be losing ground despite an additional 1 million bpd production cut. Crude prices are decreasing, contrary to the usual trend following such cuts. Typically, such cuts resulted in a 30% rise of crude prices in the following months. This time a consolidation of Brent crude prices below the resistance at $83.00-85.00 per barrel translated into a decline towards the nearest support is at $74.00-76.00 per barrel. The next support is located at $65 per barrel. Prices are trying to hold themselves above the support to recover.

Gold prices are moving inside the mid-term upside formation with targets at $2000-2100 per troy ounce that have already been met. Prices broke through the resistance at $2100 per ounce to $2141 level and rolled backed to the nearest support is at $1990-2010 per ounce. Prices are rolling back pushed down by a technical weakness period that will last by mid-January potentially leading gold prices below $2000 per ounce.

The Greenback moved lower its primary correction targets at 1.08500-1.09500 against the Euro to 1.07800. Further correction is tied to the prospect of a Christmas stock rally. In this scenario, the EURUSD may rise towards 1.12000-1.13000. Alternatively, the Greenback could resume its strengthening towards parity with the Euro.