Weekly Outlook Report - Week 3

The Federal Reserve has spoken and the economy is answering back. Last week inflation in the U.S. continued its downward-sloping movement for the 6^th month in a row, slashing off almost 2.6% in inflation.

This proves to a certain point that the monetary policy used by the Fed is doing its job in taming the inflation rates and decreasing prices.

On the other hand, on Tuesday in Powell’s speech, he clearly mentioned that they will keep on increasing rates, however, the pace will be directly dependent on the inflation figures.

As a result of the figure released the past week and as expected we have witnessed a drop in the dollar index, which lead to bullish pulls on EUR, GBP, and other major currencies.

Figure1: Dollar index against EUR, GBP and JPY, Weekly Timeframe, Kyofin.com

The sterling was not able to strengthen as much as the EUR as the GDP release came better than expected showing signs of possible recovery, which gives more space for the BOE to be aggressive in the rate increases.

Inflation in the UK is set to be released this Wednesday at 11 am GMT+4 with the expectation of a decrease in rates from 10.7% to 10.5%, if figures meet expectations or beneath, this might lead to a weaker sterling, which might be as equal as the weakness in the U.S. dollar.

Precious metals benefited last week from US inflation data, which showed a slowdown in inflation to 6.5%, the lowest reading since November 2021, supporting market expectations that the US Federal Reserve will slow the pace of raising interest rates at its February meeting and that the Fed will only raise interest rates by 25 basis points.

Gold rose last week by 3% and closed at 1920 levels, and this is considered the best weekly closing since April 2022, and the continuation of trading above these levels is a positive indicator for prices.(Figure 1) shows that gold is trying to target the previous peak at $2000 an ounce we will monitor its ability to do so.

As for silver (Figure 2), it rose by 2% in the previous week and is trying to surpass the important resistance area at $24.6 an ounce. We will monitor its ability to do so, considering that exceeding those levels makes us expect a positive performance of the price movement.

Figure (2): XAUUSD, Metatrader5, CFI Brokerage

Figure (3): XAGUSD, Metatrader5, CFI Brokerage

Stocks gained for the second week in a row as investors weighed key inflation data and the quarterly earnings reporting season began in earnest on Friday. The US CPI inflation data on Thursday provided the best news of the week.

The headline print came in as expected with a 0.1% decline MoM, leaving the YoY number at +6.5%. The energy was the biggest driver of the decline in the YoY print along with Goods costs, which tumbled to their lowest since Feb 2021 However, Services and Food costs rose on MoM basis. Services inflation soared to its highest since Sept 1982. The shelter is still rising on MoM basis. The shelter was the biggest contributor to the Core CPI 0.3% gain.

Dow jones was up last week by 2%, sp500 gained 2.7%, and Nasdaq 100 gained 4%. A host of Fed officials will be speaking this week, providing more clues for investors. T

he World Economic Forum’s annual meeting kicks off in Davos, Switzerland, with speakers there including European Central Bank President Christine Lagarde and the International Monetary Fund’s Kristalina Georgieva.

The U.S. Labor Department releases its December producer-price index (PPI), which measures prices that suppliers charge businesses and other customers. The U.S. Commerce Department releases December retail sales, which measure spending at stores, online, and in restaurants.

The S&P 500's earnings are expected to have decreased by 4% and revenues grew by 3.9% during Q4’2022. If the decline happened, it would mark the index's first decline since the pandemic as 55% of S&P500 cited unfavorable foreign exchange rates and increasing expenses in Q4.

To date, 29 S&P 500 companies reporting actual results for Q4 2022, out of which 23 firms reporting a positive EPS surprise, and 20 S&P 500 firms have reported a positive revenue surprise.

Positive earnings surprises were reported by businesses in the financial sector as they were positively impacted by the interest rate hikes boosting income from loans. However, economic uncertainty still is stressing investors and businesses. For instance, JPMorgan forecasts 2023 net income below Wall Street estimates of $75.2B, and Citibank forecasts a recession in the second half of 2023.

Citibank CEO Jane Fraser said: “While the pipeline looks more promising and client sentiment is improving, it would be hard to precisely predict when the tide will turn in 2023.” Wells Fargo’s Chief Financial Officer also highlighted his negative outlook for the coming period stating: “We’re planning for it to get worse than it’s been over the past few quarters,” said Mike Santomassimo, and lastly JPMorgan Chase CEO, Jamie Dimon said:

“We still do not know the ultimate effect of the headwinds coming from geopolitical tensions including the war in Ukraine, the vulnerable state of energy and food supplies, persistent inflation that is eroding purchasing power and has pushed interest rates higher, and the unprecedented quantitative tightening.”

Some of the Upcoming Earnings during the upcoming week (16/01/2023-20/01/2023)

OIL:

Brent and WTI regained almost all their losses – 8.9% & 8.7% respectively from the first week of January trading sessions as Brent oil closed near last week’s session high $86.96 (fig.1) and WTI at $81.44 (fig2). Both have been in a trading range since December 2022 to date, trading between support zone at $78 for brent and $70 for WTI and resistance zone $90 for brent and $83 for WTI with the 100-week exponential moving average imposing an important resistance level.

After drawing 221 million barrels from its SPR, the US Department of Energy has rejected offers submitted for February for a reserve refill as it was too expensive to accept. The plan was to accept 32 million barrels when oil reached $70/b and new data released shows another 0.8-million-barrel draw from the SPR. There are speculations that the DoE may not have enough funding to refill the SPR completely. According to WSJ “the DoE has $.48 billion in purchasing power. At the desired $70 per barrel, that would give it enough funding to refill the SPR to 440 million barrels. “

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