Friday’s dire US jobs report was a reminder of the economic costs of the pandemic, which is still showing no signs of abating. Fresh lockdowns for most parts of Europe and elsewhere means the global recovery is likely to have stalled and we will probably see evidence of that in the upcoming global data releases. But despite the weak jobs report, the stock markets initially went up, while US bond yields and the dollar held onto their gains, causing an aggressive sell-off in precious metals. Judging by the reaction of bond yields and precious metals, it looks like investors are perhaps expecting inflation to return and are thus preparing for the Fed and other central banks to begin tapering talks in the not-too-distant future, before shrinking their huge balance sheets when the world economy is hopefully on a sustainable path of recovery in the years ahead.
One reason why inflation expectations have risen is due to the victory for the Democrats in the Senate, which means more fiscal support could be easily provided if the economy needed it. In fact, President-elect Joe Biden has pledged to expand the $900 billion stimulus package agreed in Congress. The potential for further government spending could push up inflationary pressure, which is why the dollar has shown signs of life again.
But are the markets getting ahead of themselves?
The Fed has committed itself to allow for inflation to overshoot the 2% average target, meaning that even when the pandemic is hopefully over, the era of ultra-low interest rates will remain in place for years to come. Indeed, the Fed has said it would also keep its $120bn-per-month QE programme until “substantial further progress has been made” in the recovery. This should keep the upside limited for the dollar and yields, and downside limited for gold and silver.
As far as the week ahead is concerned, well there isn’t an awful lot to look forward to. Donald Trump has finally admitted defeat after facing stern criticism this week for the actions that unfolded on Capitol Hill. So, there won’t be much political drama to look forward to either.
The week ahead features only a handful of potentially market moving data, while on the earnings front, no major US companies are reporting their results until Friday when three banks are scheduled to report. We will have earnings from JP Morgan, Wells Fargo and Citi group all on Friday, ahead of a busier schedule in the following two weeks.
- Wednesday: Eurozone industrial production and US CPI
- Thursday: Chinese trade figures, US jobless claims and a speech by Fed Chair Powell
- Friday: UK GDP, manufacturing production and construction output; US retail sales and Industrial Production
Keep an eye on gold after its big drop this week. Has the metal topped out, or will the buyers step in again to buy this latest dip? The 200-day average has historically been a good area to look for a bounce, but will it hold this time? The bulls definitely need some confirmation now after what’s happened this week.
Source: ThinkMarkets and TradingView.com
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