Stocks fall, and a rebound in inflation?

Written by Convera’s Market Insights Team

Dollar extends gains

Boris Kovacevic – Global Macro Strategist

The first trading week of the year is shaping up to be a negative one for risk assets with US equities unlikely to build out their 9-week winning streak any longer. Markets have recently pushed down their bets of Fed easing for this year but remain convinced, that at least five rate cuts will be implemented, starting with the first one in March. The dollar extended its gains to above 1% and is on track to record its best week since July 2023.

Last month’s FOMC meeting had been enough to convince investors of a coming regime change in monetary policy with Chair Jerome Powell citing progress on the inflation and labor front. However, participants of the FOMC agreed to hold the benchmark interest rate at restrictive levels for some time with some stating their willingness to tighten policy if necessary. Overall, the Fed’s meeting minutes released yesterday were more hawkish than Jerome Powell’s tone indicated during the press conference in December. Still, markets did not really react to the document, as most investors continue to follow the data for any clues on when the Fed might start its easing cycle.

One such data point has been the US JOLTS number. Job openings in the United States fell by 62 thousand to 8.79 million in November. Both the demand for workers and the quits rate fell to near three-year lows, indicating some level of easing of the labor market. Fewer people switching jobs could mean a continued moderation of wage growth in favor of the Fed’s inflation target. This puts the focus back on the US labor market report on Friday. Economists are expecting a print between 170k – 190k, after a rise of 199k in November. Before that, we will get the ADP employment report and initial jobless claims today.

Labor market holds up, inflation next

Boris Kovacevic – Global Macro Strategist

The euro ($1.09) is off to a bad start to 2024 and is on track to extend its weekly losses (-1.15%) after falling for five consecutive days. Investors have started retracting some of their bets of aggressive policy easing from the Federal Reserve this year. This cautiousness has created a risk unfriendly environment to the detriment of the euro and global equities. The first macro data of the year is starting to come in but has so far not had much of an impact on currency markets.

Yesterday’s data out of Germany showed the Eurozone’s largest labor market remaining somewhat resilient. While joblessness rose by much less than was expected (5k vs. 20k) in December, it still constituted the longest streak of rising unemployment numbers (11 months) since 2005. The joblessness rate ticked up from 5.8% to 5.9%. The two main leading indicators for the German labor market remain negative but have recently turned up slightly, suggesting that the expected rise in the unemployment rate might be limited. This will be an important factor for the European Central Bank to watch over the upcoming months as inflation is expected to rebound due to base effects. German inflation is forecast to tick up from 3.2% to 3.7% in December.

Investors will most likely look through the short-term reflationary impulse, as most leading indicators continue to suggest a moderation of consumer price growth in the first half of 2024. This will give policy makers some space and flexibility to cut interest rates this year. The extent of the policy easing, however, will be determined by both inflation and the macro data. Geopolitical developments, elections, fiscal policy, and China will be factors that will have to be taken into consideration when setting monetary policy this year. However, for investors to reprice their expectations of significant easing in 2024, a lot would have to go wrong. This is why the consensus sees the EUR/USD pair rise slightly this year. The real rate differential still favors the common currency trading below $1.07. Still, a weakening of the US labor market, starting with a weak non-farm payrolls print on Friday, could lay the groundwork for some marginal euro positivity.

Pound in the hands of external factors

Boris Kovacevic – Global Macro Strategist

Sterling pusher higher in yesterday’s trading after having recorded its worst day in months on Tuesday. Upon gently testing the $1.26 level, GBP/USD reversed back to $1.2680 after stronger than expected PMI numbers out of the United Kingdom supported the British currency. While the manufacturing sector remained in negative territory for 18 consecutive months, the much more important services sector continues to outperform expectations, pushing the composite PMI further into expansionary domain. GBP/EUR is starting the year on solid footing and is pushing higher to test resistance at the €1.16 level.

The economic data out of the United Kingdom is scares this week, meaning that the pound will be dominated by events happening in the US and Eurozone. This could be good news for sterling, as the effect of the positive PMI print from yesterday could linger on for some time. This would hold true in the case of further data disappointments from the two other regions. However, if Eurozone inflation or the US labor market report surprise to the downside, some of this week’s gains could be retraced.