We are nearing the end of the first month of 2024 with US equities near record levels and the US dollar broadly rebounding against all G10 currencies month-to-date. With all important data points for December and 2023 overall having been published, investors are finally leaving last year behind. The first central banks have already met and have officially rung in the monetary policy year. We recap what has moved markets this week.
Q1 out of question? January has been all about the broad pushback of policy makers and the economic data against the trend of lower bond yields that started in November. Central bankers have won the first round against investors that had hoped to see the first rate cuts from the Fed, ECB and BoE already in March.
The year of lower yields? However, it is only a partial victory, as investors continue to price in significantly more easing than policy makers are currently comfortable with. The cumulative rate cuts priced in for the next 24 months for the ECB, Fed and BoE have decreased from 700 basis points at the end of last year to 570 basis points as of now. Markets added 10 basis points of cuts to the ECB for 2024 after the central bank’s policy meeting this week, highlighting the easing bias ingrained in markets right now.
US exceptionalism. The US dollar continued to be well bid in January as the US economy outperformed its global peers. China and Europe are starting to signal attempts to bottom. However, leading indicators are asymmetrically moving and are only slowly turning north. While we do think that we are near the end of the US exceptionalism theme with the procyclical countries starting to recover, confirming this assumption will be key in the coming months. At the same time, China is nearing a watershed moment, as policy makers are starting to get uncomfortable with the 40% drawdown in Chinese equities.
Global Macro
No change to policy this week
Investors not buying cautious ECB. The European Central Bank (ECB) kept interest rates unchanged at record levels at 4.0% during its first meeting of 2024 and pledged to maintain them at sufficiently restrictive levels for as long as necessary to bring inflation back to its 2% target, despite concerns about a looming recession and a gradual easing in inflationary pressures. The reluctance to focus on timing was naturally framed in terms of the necessity to gather more information, thus maintaining ECB’s data dependence stance. The next few months will bring a lot of information with March macroeconomic forecasts, January and February inflationary prints as well as wage and profit data. Markets have brought forward their bets of the ECB cutting before May and are pricing in rate cuts worth 140 basis points for the whole of 2024.
Dovish tilt from the BoC. The Bank of Canada (Boc) left the overnight target rate unchanged at 5% during the rate decision yesterday and is continuing with quantitative tightening. Markets sensed an element of dovishness in Governor’s Macklem announcement who stated that “there was a clear consensus to maintain our policy at 5%” with the deliberations “shifting from whether monetary policy is restrictive enough to how long to maintain the current restrictive stance”. The line stating the Bank “remains prepared to raise the policy rate further if needed” was also removed from the official communication, indicating that the next policy rate adjustment will most likely going to be a rate cut.
Inflation fall makes the exit harder. The Bank of Japan met for the first time this year and began the monetary policy year without giving investors any hints about when a supposable interest rate increase might come. Policy makers left the benchmark rate steady at -0.1% and kept the yield curve control parameters intact at the end of a two-day meeting.
Inflation has been above target for almost a year now and the central bank is not expecting a return to 2% this year. This does suggest an exit from the last negative rates regime in the world but leaves us guessing about the timing. Without any aggressive hawkish rhetoric, action in Q1 seems unlikely, with surveyed economist from Bloomberg seeing April as the most likely month for the rate hike. However, this week’s Tokyo inflation print has complicated the matter. Both headline and core inflation both fell more than expected 1.6%, reaching multi-month lows and falling below the Bank of Japan’s 2% target.
Strong end to a stellar year. At the other side of the Pacific, the US economy had outperformed expectations last year and defied calls of a recessionary spiral forming till the end. This week’s Q4 GDP release confirmed a growth rate of 3.3% for the annualized 3-month period through December, vastly stronger than the 2% economists had forecast. The print ends a year full of upside surprises, which has been characterized by the US outperforming the rest of the world. The release had somewhat of a goldilocks feeling to it as stronger growth had not been accompanied by a reaccelerating of inflation. The PCE price index increased by 1.7% in Q4, less than the 2.6% recorded in Q3.
Focus turns to the ISM PMI. US private activity rose to the highest level since June 2023 according to S&P Global. The services PMI has now been in positive territory for 12 consecutive months and is sitting at a 7-month high (52.9). The manufacturing PMI unexpectedly jumped to 50.3 in January, recording its first monthly expansion since April 2023. The streak of data surprised that began with the non-farm payrolls report, retail sales and industrial production numbers has continued with the US economy recording a solid start to 2024. This will need to be confirmed by the more important ISM PMI, published next week.
UK consumer confident, rises… British consumers are feeling better and more confident but are not willing to spend as much. This is the conclusion of the first (soft) survey data opening 2024 with the first economic data for January. UK consumer confidence climbed to the highest level in two years, rising from -22 in December to -19 in January. This was the third month-on-month increase and puts the index above the -20 line for the first time since the end of 2021. Falling inflation rates have boosted moral and are pushing up income expectations, which have turned positive for the first time in two years.
…but spending remains subdued. At the same time, actual spending in December and spending intentions for January remained dire. The Confederation of British Industry’s reported a drop in its monthly retail sales balance of 18 points with the index falling from -32 to -50. Retail sentiment has only been this negative two times in history, during the pandemic period and the Global Financial Crisis. Higher interest rates and the feed-through to mortgage rates are starting to weigh on consumers’ willingness to spend. The spill-over effect of lower inflation rates to higher real incomes will take some time to play out.
Watershed moment for China. Sentiment this week had been supported by the State Council in China announcing stronger measures to stabilize markets and boost confidence. First drafts show policy makers potentially releasing funds worth ~280 billion US dollars. This is good news for markets as it means that the equity rout has reached levels that policy makers are uncomfortable with. The most important equity benchmark, the CSI 300, was going into the year with an overall drawdown of 40% since peaking in early 2021. And the index had fallen another 6% in January before Monday, which has been the worst start to any year since 2016. However, since the announcement, the CSI 300, Shanghai Composite and Hang Seng have risen by 4%, 7% and 10%. USD/CNY is on its way to record the first weekly appreciation this year and is trading around 7.15, slightly above its 50-week moving average.
Bottoming credit cycle? While largely non-market moving, the ECB’s latest Bank Lending Survey (BLS), released yesterday, showed that credit standards for loans to enterprises and households were tighter in Q4 of 2023, compared to Q3, and were expected to tighten further in the first quarter of 2024. In addition, the demand for loans continued to decline substantially, but less steeply than in Q3, driven by the multidecade high interest rates, lower financing needs for fixed investment by firms, subdued consumer confidence and weaker housing markets.
Falling Eurozone consumer confidence. The flash Consumer Confidence index (CCI) print for Eurozone fell in the month of January against market expectations of a fourth consecutive monthly improvement. The release sent a stark warning through the European markets that while leading indicators point to bottoming of the Eurozone economy, the progress remains slow and fragile.
Less contraction. Eurozone business activity is showing provisional signs of bottoming as private sector downturn moderates in January. The flash HCOB Eurozone Composite PMI improved to 47.9 in January 2024, up from 47.6 in the previous month, marking an eighth consecutive month in contraction, but at the slowest rate since last July. Manufacturing production downturn eased to the softest since last April, while services activity declined the most since October. At regional level, the headline figure hinges on the performance of smaller European countries as France and Germany registered declining PMIs.
A failed start for the German economy. The war in Ukraine and the, so far, underwhelming energy transition have brought up questions about Germany’s growth model. These lingering uncertainties are reflected in the subdued business and consumer climate indicators. Both the Ifo business and GfK consumer indicators fell more than expected in January. Households’ income expectations have fallen for 23 consecutive months, the worst rout recorded since the beginning of the survey in the 1990s. Business expectations continue to point to a very weak Q1 for the German economy.
Global Macro
A big week to end January
Monetary policy in focus. The central banks in Japan, Canada and the Eurozone have all left policy rates unchanged this week. Next up are the Federal Reserve and the Bank of England. While no policy action is expected, investors will parse through the comments and press conferences to gauge when first rates cuts are likely. Markets are split about the Fed’s March meeting, putting the probability of a cut at 50%. The BoE is expected to be the last G3 central bank to cut interest rates. However, the recent data has been mixed at best and we continue to expect UK inflation to fall to 2% around the middle of 2024.
Big macro week. If that would not be enough, next week will also feature some big macro releases in the form of US jobs data (JOLTS, ADP, non-farm payrolls), Eurozone GDP, inflation and consumer confidence and the US ISM manufacturing print. European and German inflation has most likely taken up its disinflation trend in January, after having rebounded the month before. With Germany at risk of a recession, it will be hard for the ECB to continue arguing for cuts to take place as late as summer.
Macro risk events.
Monday (29.01) –
Tuesday (30.01) – Eurozone GDP, US JOLTS, US Consumer confidence
Wednesday (31.01) – US ADP report, Canadian GDP, Fed rate decision
Thursday (01.02) – Eurozone inflation, BoE rate decision, ISM PMI
Friday (02.02) – US non-farm payrolls report
All dates GMT
FX Views
Strong January for USD but tide could be turning
USD Best G10 performer in January. The economic outperformance of the US and rising yields have shaped the month so far. The Greenback has benefited from this development via two specific channels. Firstly, via the lower probability of the Fed having to cut rates in March, and secondly, via the risk sentiment channel. Less policy easing from the Fed, ECB and BoE translates into less appetite to take on risk. Which explains why the US dollar is up against every single G10 currency year-to-date. DXY is on track to rise for a fourth week and has not completely recouped its losses from December. Still, this week’s gains have been minor and made against specific currencies. The US dollar is now at threat of stimulus from China and the Fed leaning into its December dovishness fueling risk-on sentiment and pushing the Greenback lower.
EUR ECB holds rates as expected. The ECB kept its deposit facility rate at an all-time record of 4% during its first meeting of 2024 and pledged to maintain policy rates at sufficiently restrictive levels for as long as necessary to bring inflation back to its 2% target, despite concerns about a looming recession and a gradual easing in inflationary pressures. Adding to the apprehension, an unexpected worsening in both Ifo and GfK Consumer Indicators for the month of January raised alarms about the health of Germany’s growth. As a result, the German 10-year Bund yield slipped towards the 2.2% mark, down from a near two-month high of 2.371% touched on January 25th. The euro weakened towards the $1.08 mark against the US dollar, reaching the lowest level since mid-December, amid general dollar strength driven by robust US GDP data. EUR/GBP depreciated to a 5-month low as hawkish ECB failed to convince the markets and British Pound remains strong on the back of stronger-than-expected PMI data. The key risk event for the euro will be the Fed rate decision on Wednesday. If the Fed sticks to its dovish shift from December, we could see EUR/USD appreciate back above $1.09 and perhaps edge towards $1.10 level.
GBP Investors favoring the pound over the euro. Investors are parsing through this week’s data to justify leaning one way or the other when it comes to the pound. Policy easing bets have fallen globally. However, investors have pared back their cutting expectations the most for the Bank of England. Stronger than expected CPI and PMI numbers have overshadowed the weak consumer confidence and retail sales numbers. GBP/USD has been trading around the $1.27 anchor for six weeks now, without any hint of a breakout. GBP/EUR has risen above €1.17 for the first time since September and is on track to record its fifth weekly appreciation in a row. Weak data from the Eurozone and a slight dovish ECB have supported the pound. The risk is now to the downside as we don’t expect the BoE to live up to these hawkish expectations on Thursday.
AUD Aussie Business Confidence Rebounds But Growth Concerns Linger. Australia’s business confidence rebounded in December but remains below average amid subdued economic growth, according to a National Australia Bank survey. While business conditions eased, confidence in mining and retail picked up. However, manufacturers, retailers and wholesalers showed the weakest confidence and conditions as consumers cut spending. While retail confidence rose during the holidays, price growth fell sharply with cooling inflation. Input cost pressures further moderated. The RBA targets 2-3% inflation but CPI neared a two-year low of 4.3% in November. Tactical AUD/USD bounces may fade if unable to clear 0.664 resistance, increasing odds the pair revisits its Q4 range. Retail sales, CPI, PPI and trade data are eyed next week.
CNY PBoC Slashes RRR, Rates To Support Economy Before New Year. China’s central bank will cut the RRR by 50bps on Feb. 5 before the Lunar New Year holiday to support the economy. The PBOC also lowered relending and rediscount rates for small firms and agriculture. It aims to curb lending to overcapacity sectors and provide 1 trillion yuan in long-term capital. The moves follow recent weak data showing struggling manufacturing and exports. USD/CNH nears initial targets after breaking its November-January reversal pattern. While 7.16-7.19 presents key support, focus turns to manufacturing and services PMIs next week for economic direction.
JPY Japan Manufacturing Slump Continues While Service Sector Picks Up. Japan’s Jibun Bank flash manufacturing PMI changed little in January, signaling an eighth straight month of shrinking factory activity as orders and backlogs fell further. But the pickup in the flash services PMI to a 4-month high suggests domestic demand is providing some offset as foreign services demand expands. The composite PMI also climbed but remains just above the 50 boom/bust level. The USD/JPY bounce exceeded expectations, nearing initial resistance around 149.50. With the uptrend looking stretched on long-term yield differentials, a break below 145.97-146.97 support would confirm trend reversal. Key data next week includes industrial production, retail sales and household confidence.
CAD Dovish BoC tilt leaves CAD vulnerable. The BoC held the target for its overnight rate at 5% for the fourth consecutive decision in January, as widely expected. The Governing Council remains confident for CPI inflation to return to its 2% target by end-2025 but continues to be concerned about risks to the persistent core inflation. The Bank has also marginally cut its outlook for economic growth in 2024 and 2025, acknowledging that the economy “has stalled” in the meantime. Consequentially, Canada’s 2-year bond yield fell to a 1-week low towards 4.0% as market participants increased their rate cut bets once again, pricing in 103bps (+6bps w/w) cuts by year end. USD/CAD touched a fresh 6-week high and is on track to appreciate for the 4th consecutive week – the worst weekly performance in 5-months – amid broad CAD weakness and renewed US strength thanks to unexpectedly robust GDP print. Seasonality analysis shows that CAD typically depreciates against USD in January, and we expect that to be the case this time round. CAD has been tracking quite closely the dynamics in US data, and that may remain the case until a broader USD decline emerges and favours pro-cyclical currencies such as CAD.
