Week Ahead: 17 January 2022

As we start to look ahead towards the week ahead, something that has become clear is over the last couple of weeks or so is a clear disparity between the performance of European and US stock markets. It looks like investors are preferring the appeal of European markets due to a relatively more dovish central bank and the potential for a strong rebound in economic growth as nations ease travel restrictions amid ongoing booster vaccination efforts. In the US, monetary policy is going to be tightened this year and this has reduced the appeal of growth and overvalued technology stocks and as investors grow worried about the health of the world’s largest economy.

Indeed, Friday saw the release of disappointing US December retail sales – which dropped by the most in 10 months – and industrial production, suggesting the economic recovery slowed down just as omicron started to spread in the US. Soaring inflation is eating into consumers’ disposable incomes. This week, we found out that consumer prices rose to their highest level since the 80s at a whopping 7.0%, while producer prices also remained near 10% year-over-year. With WTI crude climbing to $83, gasoline prices should remain elevated and further underpin inflationary pressures and undermine disposable incomes.

The Federal Reserve is getting worried the rapid rise in inflation and signs it is not going to ease back towards the 2% goal any time soon. Multiple officials have come out this week to speak about inflation and the Fed’s monetary policy response, ahead of their January meeting blackout period. They have made it quite clear that interest rates are very likely to start going up from March. In 2022, there will likely be 3 or even 4 hikes.

Yet, the dollar hasn’t exactly been surging in response. The greenback fell back this week amid concerns that omicron and high levels of inflation is going to hurt the world’s largest economy. But with the Fed growing more hawkish after being head and shoulders above the likes of the BoJ and ECB in terms of its readiness to start policy tightening, the downside risks for the dollar should be limited going forward.

On a more micro level, stock investors got a snapshot of the financial standing of the economy, and it wasn’t a great picture as JP Morgan and Citigroup saw their shares decline on the back of disappointing fourth quarter results. Banks will remain in the spotlight in the week ahead as the earnings season gets going. Bank shares have benefited in recent times, owing to rising interest rate expectations and ongoing rotation into value stocks and out of growth.

Will we see better showing from the likes of Bank of American, Goldman Sachs and Morgan Stanley in the week ahead? But with expectations being sky high, investors won’t be easily impressed.
 
Economic and earnings highlights

Monday: China GDP, retail sales and industrial production

Tuesday

Friday – retail sales from UK and Canada