Written by Convera’s Market Insights Team
Check out our latest Converge Market Update Podcast covering global markets start to 2024, the US macro outperformance, China’s watershed moment and geopolitical developments featuring global macro strategist, Boris Kovacevic.
Stellar GDP report, focus turns to PCE
Boris Kovacevic – Global Macro Strategist
The US economy has outperformed expectations last year and defied calls of a recessionary spiral forming till the end. Yesterday’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. Equities have benefited from the positive news flow so far this week and are sitting just basis points away from their record highs. The US dollar is on track to appreciate for the fourth consecutive week, having pushed significantly higher against the euro Australian dollar, Canadian dollar, and Swedish krona.
On the fixed income side, 2- and 10-year US Treasury yields are likely to fall this week on anticipation of weaker inflation rates ahead. However, the 30-year yield is up around 33 basis points in January alone and currently sits at 4.350%. Markets will have to absorb a lot of new debt issuance from the US government this year. Still, the expected moderation of the economy and falling inflation rates could continue putting downside pressure on yields. Investors will keep a close eye on the US PCE release later today.
Core inflation is forecast to have fallen from 3.2% in November to 3% in December. This would put the Fed’s preferred inflation gauge at the lowest rate since early 2021 and would confirm that the disinflationary trend continued at the end of last year. Markets have penciled in six rate cuts from the US central bank for 2024 but are split on the timing. Market pricing has gone back and forth between the March and May meeting with the probability of a March cut currently at exactly 50%.
ECB holds rates as expected
Ruta Prieskienyte – FX Strategist
The European Central Bank (ECB) kept interest rates unchanged at record-high levels 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 three key ECB policy rates remain at 22-year highs for the third consecutive time at 4.5% for the main refinancing operations, 4.75% for the marginal lending facility and at 4% for the deposit facility.
During the press conference, President Lagarde told reporters that officials unanimously concurred that it was premature to engage in discussions regarding interest rate cuts, carefully avoiding any hints or commitments to a specific policy rate path. 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. In relation to PEPP, the statement repeated the December resolution whereby the reinvestments would continue in full during H1 of 2024 and then be gradually phased out by the end of the year.
In terms of market reaction, broad European stock indices ended the day higher, tracking Wall Street, with STOXX 50 closing at a 23-year high. Frankfurt’s DAX 40 edged lower as German business morale unexpectedly deteriorated in January, with the climate index hitting its weakest level since May 2020. Rates edged lower, with German 2-year bond yield plunging by 90bps to 2.620%. In FX space, EUR/GBP closed lower at 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. EUR/USD fell below $1.0840, a 6-week low, as the hawkish ECB rate decision was overshadowed by broad USD strength amid an unexpectedly robust GDP print for 2023 Q4.
Stronger consumer that spends less
Boris Kovacevic – Global Macro Strategist
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. 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.
The data only marginally dented the pound, as t he currency is still supported by the move higher in domestic yields. The British 2-year bond yield is on track to rise in January. This would be the first monthly increase since August 2023. Investors have pared their rate cutting expectations the most for the Bank of England out of the G3 central banks as inflation had surprised to the upside in December and the purchasing manager index remained in expansionary territory for the third consecutive month. GBP/USD is down this morning and sits slightly below the $1.27 level. As we have said yesterday, this level has been the anchor for the currency pair for six weeks now. Substantial re-pricing of the current narrative is needed to change that.
Key global risk events
Calendar: January 22 – 26
Euro down this week
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.
