Check out our latest Converge Market Update Podcast covering global market’s start to 2024, central bankers fight against investors, the US macro outperformance, China’s watershed moment and geopolitical developments featuring global macro strategist, Boris Kovacevic.
Written by Convera’s Market Insights Team
US activity holds up as China helps sentiment
Boris Kovacevic – Global Macro Strategist
Wednesday was a big day for global markets. The plethora of PMI upside surprises throughout the developed world and the positive news flow from China have pushed US equities to record highs once again in yesterday’s trading session. The S&P 500 is likely to record a third consecutive weekly rise and is now sitting at around 4870 points, 18% above its November low.
The US dollar moderated a bit after the PMI’s out of Europe but gained back some of the losses as US private activity rose to the highest level since June 2023. 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 it’s 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.
Sentiment 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.
EZ PMIs give ECB a lot to think about
Ruta Prieskienyte – FX Strategist
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.
Overall, the PMIs data continue to raise concern around inflation. Manufacturing price pressures remain moderate despite the Red Sea disruptions, but the service sector indicates another acceleration in input costs due to higher wage costs which are being transferred to consumers. Given that the eurozone economy remains in broad stagnation and risks to inflation remain skewed to the upside, arguments are stacking up for the ECB not to cut before summer, in line with President Lagarde guidance last week. Mounting price pressures mean that getting a glimpse of first quarter wage agreements’ data will be ever more crucial for the ECB before adjusting the policy rates. Today, we are expecting the central bank to stick to a hawkish rhetoric and continue to push back against the current market pricing – 64% probability of an April rate cut and 128bps cumulative rate cuts by year-end.
EUR/USD surged by 0.7% to a 1-week high of $1.0932 in the early European trading session on the back of the subjectively positive headline flash EZ PMIs. However, the pair was not able to hold on above the $1.09 handle and erased part of the early gains soon after as US composite flash PMIs climbed to a 7-month high. EUR/USD could be left vulnerable if President Lagarde delivers anything but a convincingly hawkish performance during the press conference after the rate decision later today.
GBP anchored around $1.27 and €1.17
Boris Kovacevic – Global Macro Strategist
The purchasing manager indices for the Eurozone, United Kingdom and US all surprised to the upside in January, leaving FX markets mostly unchanged. GBP/USD ended the day with a slight gain of 0.3% as the currency pair once again establishes itself above the important $1.27 level. Cable has now been above the 50-week moving average for two consecutive months, with the support line currently sitting at $1.2650.
Investors are parsing through the data to justify leaning one way or the other when it comes to the pound. However, as the pricing for the Fed and BoE has been fairly synchronized, FX price action has become subdued. 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 in yesterday’s trading but the euro recouped most of its losses during the trading session. Investors are still digesting the important stimulus news from China and are gauging the implication of the measures on global markets. An uptick in the Chinese credit impulse would be beneficial for the pound and euro versus the US dollar as both currencies have a higher beta (sensitivity) to overall risk sentiment.
What could move the needle this week are the ECB’s rate decision and US GDP data for Q4 due later today and US inflation tomorrow. These will be the last important data releases before the Fed and BoE meet on the 31st of January and 1st of February.
Dovish BoC tilt leaves CAD vulnerable
Ruta Prieskienyte – FX Strategist
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. The questions is – when can we expect the BoC to ease rates?
On price front, the BoC has revised down its outlook for inflation to reflect assumptions for lower global oil prices, and it highlights that “evidence continues to mount that the slowing economy is leading to lower price pressures across a broad range of goods and services”. That said, the Bank remains concerned about persistent core inflation, specifically high shelter price inflation. The Bank now forecasts CPI inflation to average 2.8% in 2024, down 0.2ppts from October. As for 2025, BoC remains confident that CPI inflation to return to its 2% target by end-2025. On growth front, the central bank has marginally cut its outlook for economic growth in 2024 and 2025, acknowledging that the economy “has stalled” in the meantime. Overall, we think that the BoC will cut rates no earlier than the June meeting.
From the FX perspective, the Canadian dollar weakened further against the US dollar on the back of dovish BoC meeting and stronger than expected US flash PMIs. USD/CAD closed at a fresh 6-week low above $1.35 and remains there for the time being ahead of the US GDP print due shortly this morning. 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.
Key global risk events
Calendar: January 22 – 26
CAD weakens amid dovish BoC
Table: 7-day currency trends and trading ranges
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
