Take Five: Keep the Lights On

The state of the U.S. housing market was in the spotlight, while unseasonably cold weather in Europe sparked fears of power outages and revived concerns about energy costs.

As markets ponder the top deals for 2023, here’s what Tokyo’s Kevin Buckland, New York’s Lewis Krauskopf and London’s Dhara Ranasinghe, Naomi Rovnick and Karin Strohecker have to say about the week ahead.

1/ Select a (Japanese) pivot

Even the ultra-dovish BoJ has not been immune to investors trying to pick the central bank’s pivot.

Tokyo’s consumer price index unexpectedly accelerated to its fastest pace in 40 years, prompting some to short Japanese government bonds ahead of Tuesday’s policy decision. Speculation was fueled by a rare suggestion by policy committee members that it might be time to review ultra-loose stimulus settings.

But BOJ watchers say such a shift will not happen until Governor Haruhiko Kuroda steps down in April after ten years in charge. There are good reasons for the slowdown: the recovery is fragile and inflation, while high, is nowhere near levels seen in Europe and the US.

National CPI data will be released after the policy decision – on Friday.

2/ It’s cold outside

A cold snap in Europe has increased the risk of power outages, which could add to the pain from energy shocks and high inflation. It also tests Europe’s resolve to conserve energy and mitigate the economic impact of the war in Ukraine.

Gas storage in Europe is almost 90% full after EU governments moved to build up reserves following a disruption in Russian supplies, but a series of nuclear power outages, notably in France, fueled fears of power outages.

France is struggling to avoid blackouts, while Germany is spending huge sums keeping power on.

Emmanuel Macron said it was absurd to fear a power outage would cripple infrastructure, while officials warned of possible outages and the French banking federation said cash machines would be affected.

Traders trying to gauge how severe the slowdown in the European economy will prove to be should pay attention to the weather forecast.

3/Economy Class

Can the U.S. Avoid a Recession as Consumer Prices Recover?

Investors will get a fresh look at the world’s top economy and its inflationary pressures on Tuesday when data on November housing starts and existing home sales are released. Rising mortgage rates led to a record decline in U.S. existing home sales for the ninth straight month in October, while homebuilding slumped and single-family home projects fell to near 2-1/2-year lows.

Wednesday is due to release the Conference Board’s survey of consumer sentiment, which fell to a four-month low in November. The Personal Consumption Expenditure Index is also due on December 23, following weaker-than-expected inflation data recently.

4/ Emerging market interest rates

A string of emerging market central banks will mark the end of a year in which the scale and pace of interest rate hikes in developing economies hit a multi-year high.

In emerging Europe, where inflationary pressures remain, policymakers in Hungary and the Czech Republic are scheduled to meet on Tuesday and Wednesday, and both held rates steady at their last meeting but pledged to tackle inflation.

Thursday’s meeting is scheduled for Indonesia – where the central bank has just seen increased growth in its mandate – and Egypt, which qualifies for IMF support. Outlier Turkey will make a decision on the same day, but observers do not expect any change after cutting interest rates to single digits ahead of next year’s election despite rising inflation.

5/2023 Top Deals

Now is the season to be bullish about the year ahead, at least if you sell stocks for a living. However, with recession looming in the U.S. and Europe, fund managers expect another bad year for stocks and are busy with low-risk trades.

Investors surveyed by Deutsche Bank expect the S&P 500 to fall 2.2% next year as the recession is deeper than expected.

One trend many agree on is that inflation will subside, stoking enthusiasm for Treasuries and investment-grade corporate credit after a slump in 2022.

Expectations of a weaker dollar as the U.S. economy slows fueled optimism for emerging markets, which should also benefit from China easing COVID-19 restrictions. Fund managers are widely betting against the yen against the dollar as speculation mounts that the Bank of Japan will abandon its ultra-dovish monetary policy.

(Compiled by Karin Strohecker, graphics by Sumanta Sen and Vincent Flasseur, edited by Barbara Lewis)