Hawkish Comments by Fed Chair Likely
STOCK INDEX FUTURES
Later this week, fourth-quarter earnings season kicks off with major U.S. financial firms reporting results.
The 9:00 central time November wholesale inventories report is expected to show a 1.2%. increase.
The longer-term fundamentals remain supportive despite the more hawkish Federal Reserve.
The U.S. dollar index advanced as traders expect further hawkish commentary from Federal Reserve Chairman Jerome Powell when he testifies before the Senate tomorrow at 9:00.
The U.S. dollar index and the euro currency remain in broad sideways patterns, and with interest rate differential expectations offering no clear advantage to either currency, the sideways trade will likely continue for the U.S. dollar and the euro currency over the near term.
The euro area seasonally-adjusted unemployment rate edged lower to 7.2% in November 2021, the lowest level since March 2020 and in line with market estimates.
The British pound hit a new two-month high against the U.S. dollar before profit taking came into the market. Sterling has also touched its highest level against the euro since February 2020.
A hawkish Bank of England will likely continue to support the British pound. The Bank of England surprised traders in December by hiking interest rates from record low levels. The central bank will probably increase interest rates again as early as next month. Financial futures markets have priced in up to four Bank of England interest rate hikes in 2022.
The Japanese yen steadied, as Japan’s finance minister recently stressed the need for currency stability and said he was watching market moves and their impact on the economy. The yen dropped to 5-year lows last week due to diverging monetary policies. The Bank of Japan is widely expected to maintain its ultra-loose policy as Japanese inflation remained well under the 2.0% central bank target.
An accommodative Bank of Japan will likely result in long-term pressure on the yen.
INTEREST RATE MARKET FUTURES
Federal Reserve Bank of Richmond President Thomas Barkin said Friday he supports the central bank’s hawkish outlook for monetary policy and is open to increasing interest rates when its bond buying stimulus program winds down.
Several Federal Reserve officials have recently said the March FOMC policy meeting could be the time to raise short-term interest rates.
Raphael Bostic of the Federal Reserve will speak at 11:00.
Some analysts are pointing out that the FOMC is tightening credit conditions at a time when the rate of growth in the economy may be slowing, citing the flattening yield curve since March 2021.
Also, several large investment banks have reduced their estimates of GDP growth.
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