Written by Convera’s Market Insights Team
Friday adds to data confusion
Boris Kovacevic – Global Macro Strategist
The first trading week of 2024 has not exactly played out as investors had anticipated. The last two months of 2023 had been shaped by markets pricing in a goldilocks scenario of falling inflation and slowing non-recessionary growth rates allowing the major central banks to cut interest rates in the first half of this year. This narrative led bond yields on the longer end to multi-month lows and helped equity markets across the developed world reach all-time highs.
With investors back at their trading desks, something seems to have changed over the holiday. The US 10-year Treasury yield surged by the most since early October last week, dragging down risk sentiment and both the S&P 500 (-1.5%) and Nasdaq (-3%). The Greenback pushed higher on both (1) rising yields and its (2) safe-haven demand, recording its best week since July.
The drastic shift can be seen from two angles. Firstly, investors had already priced in significant policy easing from central banks going into the new year, leaving them without any new catalysts to continue this trend. Secondly, US data continued to hold up against bearish forecasts and higher interest rates. While job openings did come down quite a bit in November, the data miss has been overshadowed by low initial jobless claims and hiring momentum picking up again. The US added 216 thousand people to its workforce with the unemployment rate defying expectations of a rise in December, remaining at 3.7%.
However, the picture is not all that rosy. Private hiring (excluding the government) continues to moderate, the duration of unemployment ticked higher and the last two non-farm payrolls prints were revised down by an aggregate 71 thousand jobs. Combined with the weak ISM services survey showing hiring momentum falling to its 5th lowest level in 25 years has seen the probability of the Fed cutting its policy rate in March basically remain unchanged over the course of last week. Still, the volatility in bond markets remains high as investors try to figure out the policy path of the Fed, ECB, and BoE. Central bankers and therefore markets remain on high alert and sensitive to the incoming data.
Germans cutting back on spending
Boris Kovacevic – Global Macro Strategist
While investors are looking beyond last week’s reflationary prints in Europe, the question of when and how much the European Central Bank will ease monetary policy continues. Policy makers like Spanish central bank governor Pablo Hernandez de Cos have recently pointed out the importance of the future evolution of data in the context of driving this decision with his Austrian colleague warning about premature cutting bets.
The rise of inflation in the Eurozone from 2.4% to 2.9% in December has somewhat strengthened the point policy makers are trying to convey to markets. However, for investors to fully reprice their expectations of significant easing in 2024, a lot would have to go wrong. European economic momentum remains weak with the lagging data still not bottoming out and leading indicators only marginally rebounding. German retail sales fell by 2.5% in November, posting their worst month since April 2022 and extending their 2023 drop to 3.3%.
With factory orders already out the way, focus will shift to Eurozone retail sales and the ECFIN’s release of the Eurozone sentiment survey. Apart from the headline index, we will be watching sub-indicators like selling price expectations and hiring intentions to gauge where the leading indicators are heading. These data points will most likely not prove market moving with the euro getting its impulses from tier 1 data releases out of the United States.
While EUR/USD remained flat on Friday, the currency pair moved by more than 1% from peak to trough. This volatility is highlighting the data dependency of markets and the importance of macro data. EUR/USD recorded its worst week in five but did manage to stay above the crucial $1.09 level, currently trading at $1.0950.
Pound as the second best performer of the week
Boris Kovacevic – Global Macro Strategist
The British economy fared better than economists had expected at the end of last year, with the composite purchasing manager index rising for a second consecutive month in December. While the economy had not grown for two quarters in a row (Q2, Q3), it seems likely that the United Kingdom will avoid falling into technical recession in Q4. The strength of the services sector has compensated for the weakness in industrial production and construction and has recently re-accelerated after some months of falling momentum.
The pound has clearly benefited from this positive divergence with the Eurozone, which is most likely already in a recession. The increased odds of the European Central Bank and Federal Reserve easing monetary policy more than the Bank of England in 2024 have helped GBP/EUR start the week on solid ground, rising by 0.78% in its first week of the year. The currency pair is now trading near €1.1620 and therefore in the upper half of its 3- 6- and 12- month trading ranges. However, it is important to note that GBP/EUR has decoupled from (1) the economic surprise differential and (2) relative interest rate differential with both still pointing to the pair trading below the $1.1550 level.
The pound has been the second best currency within the G10 space last week, only falling marginally versus the US dollar. GBP/USD now trades slightly above $1.27 and has been in an upward trend since November. Most of this strength has come from a strong PMI report earlier last week and the pushed back expectations of significant BoE policy easing. This week’s attention will lie on the US inflation print. However, the current narrative of a recovering British economy will have to be confirmed by the GDP report on Friday.
Nasdaq down by over 3%
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: January 08 – 12
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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.
