The Federal Reserve is widely predicted to announce an early wrapping up of its bond purchasing scheme – aka quantitative easing – at its meeting on Wednesday.
Minutes from the last meeting of the Federal Open Markets Committee (FOMC) showed that some officials are becoming increasingly anxious about rising prices and their effect on the US economy, which was ramped up by another strong inflation print at the end of last week as US consumer prices reached their highest level since 1982.
The Fed is likely to announce the end of its asset purchases by March instead of May , said economist Mickey Levy at Berenberg, which would then open the door to an earlier interest rate rise.
The committee is likely to bring forward their estimate of when it will be appropriate to raise interest rates, having in September shown an even split between the appropriateness of waiting until 2023 before raising rates and raising them by the end of 2022.
Fed Chair Powell’s remarks at the press conference are expected to convey a hawkish tone, but as monetary policy is "far behind the curve", Levy expects the Fed will need to eventually raise rates more than is currently priced into markets.
Considering that recent Fedspeak signalled rising concerns about persistent inflation and seemed to downplay the Omicron-related downside risks, a hawkish Fed update should not surprise the markets, said ING forex strategist Francesco Pesole.
A lot of focus will be on the FOMC members' updated dot-plots of expected future rate hikes and the Fed's new economic projections, Pesole added, who predicts rate setters will forecast at least two full rate hikes in 2022.
A stronger-for-longer dollar is one likely effect of the Fed speeding up the pace of the bond taper while most other major central banks are relatively less hawkish.
A strong dollar implies a weaker pound, which is often a boost for the FTSE, while other effects are a 'bear steepening' of the yield curve (ie long-term interest rates increasing at a faster rate than short-term rates), which benefits small caps and 'Value' stocks, while creating headwinds for emerging markets and 'Growth' stocks, said UBS strategists.
Volatility in markets is currently resting on the knife edge of Fed tapering and waxing and waning fears about the effect of the Omicron variant.
"If restrictive measures are avoided stronger economic outlook should support market risk sentiment," the UBS team said.
Watch out for how gold reacts, added Carig Erlam at Oanda, as it may well depend on how dovish the language around the Fed's announcement.
"It will be tough as the dot plot will likely show policymakers have turned much more hawkish in recent months which could weigh on the yellow metal," he said.
Currys in favour?
Currys PLC, the electricals and warranties seller, reports half-year results on Wednesday having recently gone through its umpteenth name change.
The company formerly known as Dixons Carphone said back in June that it continues to see evidence that its markets will be structurally larger post-pandemic, “and that not all last year's growth was pulled forward”.
In other words, while the group’s revenue was up 2% year-on-year in the year to 1 May, management thinks not all of this growth was a result of people making purchases they were unable to make during the lockdown.
Quite who these people are who are only able to make purchases in store rather than online is a mystery but they must exist; in the UK and Ireland Dixons – sorry, Currys – says around half of its sales have been through its stores.
The company recently resumed dividend payments and shareholders might have been hoping for a special divi to make up for the time when payments were suspended but the rapid spread of the Omicron variant of the Covid-19 has probably put the kybosh on that idea.
Not much protection for Avon
Expectations will be low as Avon Protection PLC (LSE:AVON) (Avon Protection PLC (LSE:AVON)) reports on Wednesday, after August’s profit warning and the company last month delayed its results in order to carry out a strategic review following testing failures for the US Army body armour plates.
Following a contract with the US Defense Logistics Agency, the defence industry supplier formerly known as Avon Rubber saw its shares plunge drop to a four-year low as it said its vital torso protection (VTP) body armour plates had “encountered a failure” in testing, with a delay to likely approval for the product.
Following this major setback, Avon said the board has launched a strategic review of the body armour business, which had been expected to contribute US$40mln of revenue in the current financial year.
This followed August’s summer warning that it had seen an increasing impact from order delays, supply chain disruption and a "tight" US labour market.
Receipt of US$165mln of expected orders has been delayed, including a significant M50 gas mask order, with slow supply of components also hindering the shipment of another US$6mln of deliveries under existing orders.
Revenue expectations were at that point set at US$245-260mln (around £178-188mln).
Major announcements expected on Wednesday 15 December
Interims: Baltic Classifieds Group PLC (LSE:BCG) (Baltic Classifieds Group PLC (LSE:BCG)), Currys PLC, Hipgnosis Songs Fund Ltd, In The Style Group PLC (AIM:ITS) (In The Style Group PLC (AIM:ITS))
Finals: Avon Protection PLC (Avon Protection PLC (LSE:AVON)), Character Group (AIM:CCT) (Character Group (AIM:CCT)) PLC, Hollywood Bowl Group PLC (LSE:BOWL) (Hollywood Bowl Group PLC (LSE:BOWL))
AGMs: Asia Dragon Trust PLC, DX PLC, GCP Student Living, Softcat (LSE:SCT) (Softcat (LSE:SCT)) PLC
Economic announcements: Consumer Price Inflation (UK), House Price Index (UK), Federal Reserve policy decision (US), Retail Sales (US), Import/Export Prices Index (US)