Markets mixed as focus turns to 2023
Summary
Markets were largely quiet around the holidays, with strength in the jobs market and signs of reduced inflation helping to provide some risk-on sentiment. At the same time, the rise in COVID cases in China put downward pressure on demand forecasts for next year.
Up and down year for the U.S. dollar
The U.S. dollar continued its trend downwards in the latter half of December, with the dollar strength index falling below 105 for the first time since last summer. Much like the rally earlier in the year, the dollar’s strength has largely been a function of expected inflation and interest rates within the United States. With inflation showing continued signs of cooling and the Fed messaging fewer rate hikes starting sometime in 2023, the dollar came down from the historic highs it reached in September. However, it is still significantly higher than where it trended in 2020 and 2021.
(Related insight: read "Managing FX risk in a strong U.S. dollar environment")
Inflation continues its downward trend
The U.S. CPI reading for November came in at 0.1% MOM and 7.1% YOY, lower than the expected 0.3% and 7.3%, respectively. This was the third consecutive month when inflation came in below expectations, again leading to a jump in investor sentiment. The rally in equities was somewhat short-lived, though, and not enough to put a positive spin on 2022, which ended as the worst year for stocks since 2008.
Macro outlook for 2023
The jobs market within the U.S. finished off a strong year last week, with initial jobless claims at only 225k, right in line with expectations. The continued low unemployment is certainly a reason for optimism, especially with inflation trending down, but there are some other concerns weighing on the outlook for next year. In particular, the dramatic rise in COVID cases in China has created concerns around demand weakness that could impact the rest of the world. This introduced downward pressure on oil prices especially, as China is the largest importer of crude worldwide.
The week ahead
It’s another relatively quiet week for economic data, but there will be some important indicators within the jobs market, as initial claims come out on Thursday, followed by nonfarm payrolls on Friday.
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