Daily Market Outlook, December 15, 2021

Overnight Headlines

Asian equity markets are mixed this morning ahead of tonight’s announcement from the US Federal Reserve. November economic data for China were mixed as retail sales posted a less than expected 3.9% annual rise but industrial production growth accelerated to 3.8%y/y (from 3.5% in October). Meanwhile, in the US, the Senate voted to the raise the debt ceiling, lowering the risk of a default on interest payments on Treasury debt.

Just released data showed another sharp rise in annual UK CPI inflation to 5.1% in November (from 4.2% in October). That is the highest outturn for over a decade and more than double the Bank of England’s inflation target. Higher energy prices again helped drive the move, but another key contributor was a larger-than-expected rise in the ‘core’ rate (excluding food and energy) prices to 4.0% (from 3.4%). The move will reignite speculation that the Bank of England will raise its policy interest rate tomorrow. However, BoE policymakers will also need to take into account the greater uncertainty generated by the new Covid variant, which is still expected to tip the balance in the direction of delaying a move for now.

Today’s key event for markets will be the monetary policy update from the US Fed. It is expected to announce an acceleration of the pace at which it is ‘tapering’ its asset purchase programme. It seems set to double the pace from the current rate of reduction of $15bn. That would end the programme by March and potentially pave the way for subsequent increases in interest rates.

The Fed’s assessment of economic developments is also likely to reflect growing concerns about the ongoing rise in inflation. It is expected to drop its description of the rise as ‘transitory’. While it will probably still forecast an eventual fall in inflation next year, the message is likely to be that interest rates may need to rise earlier and by more than previously expected. That is despite the added uncertainty provided by the Omicron Covid variant.

That assessment will be reflected in Fed policymakers latest interest rate projections. The previous ones, made in September, showed an even split on whether the first hike will be in 2022 or later. The updates will likely now show most favouring a rate rise next year, with a significant chance that a majority will now forecast two or even three rises in 2022 with more to come in 2023.

Ahead of the Fed announcement, November retail sales are expected to confirm a second successive sizeable monthly rise. As the data is not adjusted for inflation, part of that reflects higher prices. But it seems that spending is rising in price-adjusted terms after a soft patch during the summer.

Longer-dated government bond yields edged up yesterday in both the US and the UK. However, trading was relatively quiet as markets wait for this week’s updates from the Fed and BoE. In currency markets, today’s inflation data has provided a near-term lift to sterling particularly against a generally weaker US dollar.

(Hedging effect can often draw spot toward strikes pre expiry if nearby (P) Puts (C) Calls )

EUR/USD: 1.1200 (1BLN), 1.1240-50 (718M), 1.1300 (761M), 1.1350 (594M)

1.1375 (313M), 1.1400 (2.1BLN)

GBP/USD: 1.3150 (227M), 1.32100-05 (493M), 1.3225 (468M), 1.3240-50 (909M)

EUR/GBP: 0.8550-65 (698M)

AUD/USD: 0.7100 (400M), 0.7275 (543M)

USD/JPY: 112.00 (1.4BLN), 1.1295-1.1305 (1.2BLN), 113.50 (544M)

113.75 (1.5BLN), 113.95-114.05 (1.1BLN), 114.20 (1.1BLN), 114.50 (381M)

115.00-10 (1.8BLN).

EURUSD Bias: Bearish below 1.15 Bullish above

GBPUSD Bias: Bearish below 1.36 Bullish above.

USDJPY Bias: Bullish above 112.50 Bearish below

AUDUSD Bias: Bearish below 0.7250 Bullish above