Stocks in Europe opened mildly higher in fairly subdued early trade on Monday, taking the cue from a broadly positive session in Asia that came off the back of one of the most remarkable turnarounds on Wall Street. The S&P 500 closed at a record high on Friday as investors shrugged off a 40-year high for inflation and decided that there probably still is no alternative. The 6.8% CPI print saw long dated US Treasury yields jump by the most in some months, but the 10-Year remains just below 1.5% and showing little signs of wanting to move out of its recent range. Likewise, crude prices are steady in the $71-73 range and gold continues to chop in a sideways direction under $1,800. Bitcoin similarly lacks much direction with the $50k level now acting as resistance. There’s also little in the FX space to get a grip of with majors largely sticking to tight and well-worn ranges.
The focus this week is on the last big central bank push of the year, with the Federal Reserve, European Central Bank and the Bank of England in action among others. The hot inflation in the US will see the Fed follow through on its more hawkish rhetoric of late and speed up the tapering of its QE programme, opening the door to a rate hike next year. The Fed will almost certainly drop the word ‘transitory’ in relation to inflation from its statement – time to retire it as Jay Powell said. It’s also likely that the dot plots will show much more consensus around rate hikes next year – the last dot plot in September showed policymakers were split over hiking next year. The inflation narrative has vastly changed since then. Unemployment levels have also fallen well below the level predicted by the Fed earlier in the year. Markets are already pricing in the Fed lifting rates 2-3 times next year so a more hawkish statement and dot plot should not create much drama.
The Bank of England is in a more delicate position – it's at various times in the last few months talked up the need to tackle inflation and simultaneously refrained from doing so. Labour market indicators suggest hawkishness is not going to be a problem, but the onset of new omicron restrictions could stay its hand. Inflation figures due on Wednesday will be used by the market as a proxy for a decision, but we know that the MPC is not necessarily minded to hike just because prices are rising. And we know that despite high levels of inflation in the Eurozone the ECB is not going to raise rates next year, so expect more dovishness.