Written by Steven Dooley and Shier Lee Lim
US inflation slowdown boosts markets
Global markets finished last week on another high thanks to a tame US inflation report boosting sentiment and sending key US sharmarkets to new all-time highs.
Thursday’s US personal consumption and expenditure number (PCE) fell from 2.6% in December to 2.4% in January. The core number, stripping out more volatile items, fell from 2.9% to 2.8%.
However, FX markets remain more muted, with only small moves across key currency markets.
The USD index was lower after the inflation reading, but fell only 0.3% over the week.
The AUD/USD lost 0.6% last week after a lower-than-expected inflation reading also pressured the Aussie.
The kiwi saw the biggest moves, down 1.4% last week, after the Reserve Bank of New Zealand kept rates steady at its policy decision.
The USD/CNH and USD/SGD were broadly unchanged last week.
Financial conditions ease
Although central banks had been arguing that the need for more rate rises in 2H23 would not arise from the tightening of financial conditions, they now seem to have largely de-prioritized financial conditions as circumstances have eased.
This suggests that there are upside risks to the projection for both GDP and inflation over the upcoming quarters, along with the robust credit creation that has been observed since the year’s beginning and the continuous tightness in the labour markets.
In other words, although the likelihood of a near-term recession is decreasing, there is an increasing chance that central banks may need to maintain higher interest rates for longer periods of time, or possibly raise them further.
US jobs key this week
The major event this week will be Friday night’s US jobs report.
We think that the labour market’s resilience in 2023 was consistent with both supply-side shocks and stronger-than-expected total activity, with a notable boost from immigration and an increase in the participation rate.
We also contend that this year will not see tailwinds from the cyclical normalization and idiosyncratic strengths in some industries after delving deeper into sector-specific data.
As the unemployment rate gradually rises later in the year, average gains would fall below the breakeven rate of about 100,000 per month due to the slowdown in economic activity that we anticipate later in the year.
USD lower last week, but local FX doesn’t benefit
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 4 – 9 March
All times AEDT
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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.
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