Markets look to first FOMC of the year

Edward Bell - Senior Director, Market Economics
Published Date: 24 January 2022


  • Markets this week will be looking for the first Federal Reserve FOMC meeting of the year as to when the Fed is prepared to begin raising rates. There is a limited chance that the Fed will change policy at the January 25-26 meeting but focus will be on the post-decision statement and press conference, particularly on the pace of rate hikes and other measures of policy normalization. Attention will also fall on Fed chair Jerome Powell and whether he will try and allay fears that rate hikes will imperil equity markets; major equity indices have sold off sharply since the start of the year in anticipation of rates moving higher.
  • Consumer confidence in Eurozone slipped marginally in January to -8.5 from -8.3 a month earlier. That overall confidence remained relatively stable even as Covid-19 case loads rose sharply in Europe pays testament to the waning impact of the Omicron variant of Covid-19. Should the overall wave of Omicron cases burn relatively hot and fast then the impact on growth this year should be limited, allowing domestic demand to recovery sharply over the rest of 2022.
  • In the UK the initial wave of the Omicron variant did appear to derail consumption activity with retail sales falling by 3.7% m/m in December. Government restrictions and work-from-home recommendations likely helped to disrupt retail activity in the final month of the year with clothing sales for instance falling sharply. However, the government has now announced that will remove its current Covid-19 restrictions which should help to allow for an improvement in retail activity although rising price pressures, particularly for energy, are likely to sap momentum away from growth this year.
  • Services activity in Japan showed some weakness in January as the Omicron variant pushed the government to reimpose restrictions. The services PMI fell to 46.6, its weakest level since August 2021 while the manufacturing sector actually to improve with the January PMI rising to 54.6.
  • Dubai CPI rose 0.1% m/m and 1.1% y/y in December, the fastest annual inflation in the emirate since Sep 2018.  For 2021 as a whole, consumer prices declined -2.1% y/y, largely driven by lower housing & utility costs.  The main source of inflation last year was transport costs (10.2% y/y) as a result of higher fuel prices. Recreation & culture and restaurant & hotel prices also increased in 2021 as the activity normalized. Looking forward, we expect inflation to accelerate in H1 2022 before moderating in H2. We expect UAE inflation to average 2.0% in 2022.

Today’s Economic Data and Events

  • 12:15 FR Composite PMI January: forecast 54.7
  • 12:30 GE Composite PMI January: forecast 49.4
  • 13:00 EC Composite PMI January: forecast 52.6
  • 13:30 UK Composite PMI January: forecast 54
  • 18:45 US Composite PMI January

Fixed Income

  • US Treasury markets managed to stem several weeks of losses as investors pulled away from risk assets—equities in particular—and sought some havens in bond markets. A broad index of USTs added 0.23% last week, helping to make up for a prior week’s losses. Markets will be focused on the first FOMC meeting of the year this week for any signal that the Fed has confirmed March as a liftoff date for rates. The front end of the curve remained soft last week with 2yr UST yields up more than 3bps, closing at 1.0014% while the 10yr yield fell nearly 3bps to 1.7581%.
  • In European markets the move higher in yields seemed to stumble last week with bunds rising. The 2yr bund closed down almost 4bps at -0.625% while the 10yr pushed back from moving above 0 to close the week at -0.07%. In the UK though expectations of a February rate hike from the BoE increased and pushed 2yr gilt yields up almost 9bps to 0.8760% while the 10yr rose 2bps to 1.169%.
  • Emerging market bonds showed some independent action last week with a broad index of USD-denominated bonds rising even as global equities came under pressure. In local markets Turkey was the standout with bonds gaining thanks to the CBRT holding rates unchanged. The 10yr yield on local currency Turkish government bonds fell 140bps to 21.42% last week. In South Africa yields also dropped, down almost 14bps to 9.689% while Indian yields moved higher, up 4bps to 6.626%.


  • In a two-way week for currency markets the dollar still managed to hold its edge and rose against nearly all peers. The broad DXY index added 0.5% to move up to 95.642 thanks to some heavy selling mid-week in EURUSD which closed down for the five days at 1.1344, down 0.59%. GBPUSD fared even worse, down almost 0.9% at 1.3553. JPY was the notable standout among majors, with USDJPY falling 0.45% to 113.68.
  • Commodity currencies fell in line with the move against risk sentiment. USDCAD added 0.23% to 1.2581 while AUDUSD slipped by 0.3% to 0.7185. NZDUSD was the weakest among them, however, down by 1.3% to 0.6717 as the country increases its Covid-19 restrictions at a time when many other economies are moving in the opposite direction.


  • Equity markets suffered a parlous week last week as risk appetite waned sharply, with growth stocks in the technology space especially hard hit. This saw the NASDAQ lose -7.0% w/w following a -2.7% drop on Friday, but the impact was almost as wide elsewhere as the Dow Jones lost -5.1% w/w and the S&P 500 -5.6%.
  • Losses were not quite so pronounced in Europe, but Friday was a particularly tough day there also. Over the week the FTSE 100 lost ‘only’ -0.7% despite dropping -1.2% on Friday, but the CAC closed down -1.0% w/w and the DAX -1.0%.
  • Asian markets have followed the rest of the world deeper into the red so far this morning.


  • Oil markets eased off somewhat last week despite the elevated geopolitical risks and still healthy outlook for demand. Brent futures rose by 0.7% to USD 86.68/b, despite falling in the final two days of trading. That represented their slowest weekly gain since the rally started in late December. Meanwhile WTI futures fell 0.1% last week, to USD 83.73/b with some sharp selling at the end of the week.

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