(Reuters) – Inflation is at the forefront of markets’ minds: The U.S. Federal Reserve will be looking for clues on how and when it might tighten its policy to fight inflation at 40 year highs. CPI data may force Australia to acknowledge the need to raise rates earlier. PMIs can also provide insight into spiraling service sector costs.

Companies’ wages are also shown in earnings. Politics will also complicate things with Russia, Ukraine, and Italy all being included.

This is your market week: Ira Iosebashvili@IraIosebashvili, Kevin Buckland, Dhara Ranasinghe@DharaRanasinghe and Julien Ponthus @JulienReuters. Sujata R @reutersSujataR.

COUNTDOWN TO LIFTEDOFF

If the market is right, the Fed’s Jan.25-25-26 meeting would be the last before interest rate rises.

Approximately four rate increases are expected for the year. They will be priced starting March. However, the outlook for rates aside, the markets will pay attention to what the Fed has to say about its $8 trillion-plus balance sheet.

Minutes of December’s meeting revealed lengthy discussion about decreasing bond holdings. Jerome Powell, Fed chairman, stated that the Fed could shrink the balance sheet faster than it has in the past.

A Reuters poll predicted that the Fed would begin to trim its balance sheet before September’s end, but some think it might happen sooner than anticipated. The selloff in Treasuries could be extended by Hawkish Signals.

The Bank of Canada doesn’t wait around to help its neighbor, and it could begin increasing rates this Wednesday.

GRAPHIC: FED AND YIELDS, https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwjebzpo/Pasted%20image%201642526443746.png 2/EARNINGS: MIND THE ATLANTIC GAP!

Perhaps 2022 will be the year European equity breaks a six-year streak of poor performance against U.S peers.

This continent houses a large number of value and cyclical (read cheap) stock options like banks. These stocks typically outperform technology during times of tightening monetary policy. This dynamic may already be in play, as Wall Street is trailing European markets this past year.

Europe bulls are encouraged by the positive Q4 earnings season. Data from Refinitiv I/B/E/S shows that earnings grew 49% annually. Markets were astonished by quarterly updates by luxury groups Richemont & Burberry. European profits are also less at risk from wage inflation. Barclays Note from analysts (LON:

U.S. earnings grow 23% and the markets still have to deal with Goldman Sachs (NYSE)’s profit slip and high cost increases.

In the next days, European names LVMH (STMicro), Philips and STMicro will all be reporting. IBM In the U.S., there are three major companies: Verizon (NYSE) (NASDAQ:) and Apple(NASDAQ:).

GRAPHIC: Wages growth, https://fingfx.thomsonreuters.com/gfx/mkt/znpnelgjbvl/Pasted%20image%201642600245725.png GRAPHIC: STOXX vs S&P Earnings Forecasts, https://fingfx.thomsonreuters.com/gfx/mkt/akvezewegpr/earnings%20theme.PNG 3/WANTED: NEW ITALY PRESIDENT

Italy requires a new president. Monday marks the beginning of the complicated process for replacing Sergio Mattarella. Prime Minister Mario Draghi has been named as the leading contender.

It could cause weeks of political chaos in Italy. The multi-party coalition backing Draghi’s government might fall apart if Draghi wins the job. This could also happen if there is no agreement between the parties on an alternate candidate.

This all happens as the bond market frightens about increasing inflation and a stronger ECB response. Russia’s military buildup close to Ukraine’s borders is fueling war fears. This means that geopolitical developments will continue to attract markets’ attention. GRAPHIC: Italy needs a new president, https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnjejgpq/Italytheme2001.PNG

4/RATES UP OR DOWN?

Not only has the Fed underestimated inflation, but so is every central bank. The Australian CPI data Tuesday could force Philip Lowe, Governor of the Reserve Bank of Australia to concede his long-held belief that this year’s rate increases are unlikely.

Money markets are skeptical of Lowe’s (NYSE) scenario and they expect a hike to a quarter per cent as soon as May. There will be at least three quarter-point additional increases before year’s end.

Australia’s low unemployment rate, recorded in 2008, has dropped to its lowest point. Some economists expect core inflation to rise to 2.5% this year. This reading will at most endanger pandemic-time bond buying decisions made by the RBA on February 1. GRAPHIC: RBA inflation test, https://fingfx.thomsonreuters.com/gfx/mkt/xmvjobdjepr/Pasted%20image%201642685575045.png

5/SERVICE-CHARGES

Omicron spread was a surprise to many, but global business activity held steady in December. This is according to purchasing managers indexes. On Monday, the focus will shift to how costs are shaping up when January advance PMIs become available.

Last month composite input prices fell as delays in factories’ supply chains eased. However, U.S. service industry input prices rose to their highest level since 2009. They remained close to November’s record-setting high in Europe, while they rose for the 18th consecutive month in China.

Soaring prices add uncertainty to inflation prospects in countries that rely heavily on services. GRAPHIC: Input costs, https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwjbyovo/Pasted%20image%201642626686730.png