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US stocks are selling off in what will be a massive week of corporate earnings, three major central bank rate decisions (FOMC,ECB, and BOE), and an employment report that should keep wage pressures alive. The January rally has hit a wall and probably won’t have a chance of returning until we get beyond Wednesday’s Fed press conference and Apple’s results after the Thursday close.
Spain
Treasury yields are rising after Spanish inflation unexpectedly surged, delivering its first acceleration with the annual pace in six months. For the most part, disinflation trends have been firmly in place across the US and Europe, so Spain’s hot inflation report is a big red flag that the rest of the eurozone might show inflation is already proving to be stickier than what the market was expecting. ECB hawks won’t have trouble pushing for a half-point rate rise this week. If inflation pressures for the region remain elevated over the next two months, the ECB will need to remain aggressive at the March meeting.
Germany
Germany’s preliminary GDP reading for the fourth quarter was very disappointing and suggests Europe’s largest economy is technical recession bound this quarter. The outlook is darkening quickly as the economy gets hit with higher energy prices, weakening demand, and rising inflation trends.
Oil
Crude prices are declining as the risks to the global outlook become overwhelming; China’s economy isn’t roaring back, global recession fears are returning after inflation unexpectedly rose in Spain, and as investors remain cautious ahead of a busy week of central bank decisions and peak earnings season.
Oil is pulling back here as the vibe on Wall Street is to be ready to de-risk later this week. Growth prospects are weakening here and that should not do any favors for an already weakening short-term crude demand outlook.
In addition to the Fed, earnings and a jobs report, energy traders will pay close attention to an OPEC+ meeting that could see output remain steady. President Putin had a phone call with the Crown Prince, which some are viewing as positive that the group is in agreement with the path on output.
WTI crude may edge lower but should have support well ahead of this month’s low.
Gold
Gold prices are weakening as global bond yields rally after a hot inflation from Madrid reminded investors that maybe they were too quick in declaring the inflation fight is nearly over. Gold’s main kryptonite is if the Fed can’t control inflation and they need to tighten much more than markets are expecting. Gold could enter the ‘danger zone’ if we get a couple more hotter-than-expected inflation reports and a robust NFP report that suggests wage pressures will be here for a while. Disinflation trends still remain in the US but any shock CPI report could disrupt the very bullish outlook that has been building up for bullion.
Crypto
Inflation risks are quickly cooling what was a rather impressive month for crypto. Bitcoin is declining as Wall Street becomes very defensive ahead of this week’s major risk events. The Fed is poised to downshift its tightening pace again, but they could argue that they will keep rates higher for longer and not cave at the first chance to cut rates. For crypto to have any underlying support given all the regulatory and contagion fears, inflation risks need to go away. Bitcoin has massive resistance at the $24,000 level, so if risk aversion remains in place, downward momentum might not find major support until the $21,000 region.
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