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Olusegun Enujowo


Wall Street traded higher yesterday, while stocks in Asia and Europe remain shaky as investors are cautious in the last full trading week of the year. Monetary policy decisions from the Federal Reserve and other major central banks (e.g., ECB / BOE) kick off a pivotal week for the rest of the year and the start of 2023.

Investors are on the lookout for clues as to how far and how fast central banks will tighten monetary policy. Recession fears have resurfaced as economic activity has slowed around the world, while the Fed has repeatedly said it will stay on its current course to bring inflation back down. Hopes that the Fed will slow its rate hikes have helped Wall Street recover from the lows of October 2022. Investors are hoping that inflationary pressures will continue to cool, with the main focus now turning on Tuesday(today's) CPI data.

Investors remain overly optimistic about the near-term economic outlook, and we expect stocks to turn lower again early next year as it becomes increasingly clear that corporate earnings continue to weaken. For now, however, investors remain hopeful that lower inflationary pressures will lead to a faster normalization of monetary policy and may result in a continuation of the year-end rally and a strong recovery in 2023.

Demand for bonds increased across the curve, with yields on longer-dated securities declining more than shorter-dated ones. The USD remains on track to weaken further as investors expect other central banks to follow in the Fed's footsteps and narrow the spread on interest rates. I expect the USD to stabilize with the Fed pushing back on investor's dovish hopes on Wednesday(tomorrow).

Optimism over China's reopening measures is fading as concerns over a rapid rise in infections and covid-related deaths following the chaotic end to China's Covid Zero Policy may initially lead to a worsening situation in China. The demand outlook for oil remains shaky and continues to create headwinds for oil prices, indicating that markets still believe a recession will weigh on oil demand. However, significantly falling temperatures in Europe and North America, particularly on the West Coast, are supporting oil and especially natural gas prices. The further downside potential for oil remains limited.

Markets will remain mixed and cautious today. Investors were optimistic in the previous week that inflation reading will continue to draw a picture of falling inflationary pressure in the US. However, Friday's PPI came in hotter than expected. As mentioned earlier, the more important CPI report will come in today with investors still hoping that inflation will continue to cool - a likely scenario given the falling energy pries in November and the already high inflation in the previous year.

I expect the energy sector to continue to stabilize today and also oil prices to continue to find some support. Recession concerns have weighed on oil demand forecasts, but recession worries will take a bit of a back seat today before likely returning after the Fed's interest rate decision and Fed Chairman Jerome Powell's attempt to push back investors' dovish hopes and that inflationary pressures continue to ease.

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