Week ahead: Market focus fixed on Fed and inflation

Who’s in the mood for rate statements? The FOMC’s first release of 2022 comes on Wednesday, as does the Bank of Canada’s. One of them is raising rates this month. The other will, hopefully, lay some hints as to when it plans on hiking. 

Elsewhere, watch for the latest US advanced GDP and Core PCE index figures. These key indicators will help us know more about the US’ economic recovery. 

It’s earnings season too with the busiest week on Wall Street this season so far. 

Watch for rate hike timeframe clues in this week’s FOMC statement 

On Wednesday, the Fed releases its first-rate statement of the year. 

Chances are, rates aren’t going to move in January or February, but with yields rising, markets are bracing for a March hike. 

In December 2021, the Fed confirmed it was wrapping up its bond-buying programme, with dot plotting suggesting three rate hikes are on their way in 2022. The pace of policy tightening is yet to be really established.  

Expect to see an end to bond-buying by March, when the Fed is expected to begin raising rates. A hawkish surprise this week might see an earlier end to QE, opening the path to a swifter normalisation of policy. 

This is all about taming inflation. Fed Chair Powell and his team have a bit of a firefight on their hands, with headline inflation running at its hottest for forty years. 

In economic projections made during December’s announcement, the FOMC’s policymakers think inflation would run at 2.6% next year, an increase over the 2.2% they projected in September, but then fall to 2.3% in 2023 and 2.1% in 2024. 

The unemployment rate is also forecast to fall to 3.5% this year too, according to Fed projections. 

We know rate hikes are coming. It’s just a question of when – and scrabbling for clues in this week’s rate statement to ascertain an actionable timeline. 

Will US GDP growth match expectations? 

First up on the data-sheet is US advanced GDP for Q4 2021. 

The US will be hoping for accelerated growth in the year’s fourth quarter as it looks to sustain post-pandemic economic recovery. 

The US economy grew 2.3% year-on-year in Q3 2021 – a major slowdown from the 6.6% and 6.7% annualised growth registered across quarters one and two. Delta COVID and rampant inflation stymied growth in 2021’s third quarter. 

But Q4 has Omicron and even hotter inflation to deal with. The outlook for this quarter is mixed, basically depending on when you take your predictions from. 

The Philadelphia Fed predicted in November that Q4 GDP growth would rise 4% on an annualised basis. Forecasters cited disappointment in labour markets, following nonfarm payrolls jobs misses, as reasons for the slowing growth. 

However, on January 12th, The Conference Board shared its GDP outlook at an optimistic 6%. Omicron’s impact on supply-side disruption and worker infections may not be fully felt until Q1 2022, TCB says. It should be noted that TCB’s modelling includes spending associated with the Build Back Better infrastructure bill that’s currently still struggling to get through Congress.  

So, a mixed outlook then. What we do know is the jobs market is still tight, inflation is still positively sizzling, and Omicron infections are high. Let’s point out that Omicron is not as deadly as other COVID-19 variants, but it is still a disruptive force in terms of productivity. It will be interesting to see if it made a big impact on US recovery this quarter. 

US Core PCE price index shows us how hot inflation ran in December 

Maybe we’ll find some GDP growth indicators amongst December’s US core PCE price index. This latest PCE report lands on Friday. 

This is the Fed’s favourite inflation metric. We’ve seen how successive rises in PCE nudge the FOMC towards tapering and rate hikes are now on the cards. What December’s data will tell us is how hot inflation continues to run throughout the United States. 

November’s report, released in December 2021, saw personal expenditure inflation push upwards for another consecutive month. PCE index prices grew 4.7% on an annualised basis, beating the 4.5% forecast. Consumers are feeling the pinch at the checkout. 

That said, optimism still runs throughout the US economy. A University of Michigan sentiment survey from December gave a score of 70.6. Despite inflation growing, most Americans are broadly ok with the course the economy is currently taking. 

However, the nation is still dealing with supply chain issues leading to logistical bottlenecks. Input prices for businesses remain high across the economy. These heightened costs are being passed onto the consumer, resulting in the rise in personal expenditures we’re seeing. 

While US household incomes are rising, up 0.4% month-on-month in December, they are not rising enough to really combat inflation. 

Could another hot PCE print spur on a faster rate hike from the Fed? 

Bank of Canada to hike rates? 

Speaking of rate hikes, investors’ attention has turned to Canada where the Bank of Canada is expected to announce a rate hike on Wednesday. 

A survey of Canadian financial professionals released on Monday 17th January reported that, at that time, there was a 70% chance of the BoC raising rates. 

Canada’s economy is running incredibly hot. Inflation is at an 18-year high at 4.7%. Omicron infections are rocketing upward. Labour shortages are increasing, alongside demand in the wider Canadian economy. 

Because of these pandemic-created economic conditions, forecasters expect little to no economic growth in the fourth quarter. A rate hike may be able to kickstart the economy once more. 

Governor Tiff Macklem and the team at the Bank of Canada have kept interest rates at the historic 0.25% level since March 2020. Keep your eyes trained on the BoC this week. A rate hike is probably on the way. 

It’s Wall Street earnings season 

Don’t forget Q4 2021 earnings season is in full swing. 

The megacaps are reporting their latest quarterly earnings on Wall Street and this week will be on the busiest weeks this season so far. 

Big tech features prominently in the week’s reporting with Microsoft, Apple, and Tesla all reporting in.  

Be sure to check out our earnings calendar to see who is reporting and when this earnings season. 

Keep scrolling to see the companies reporting on Wall Street this week. 

Major economic data 

Key earnings data