Written by Convera’s Market Insights team
Equities at records as macro disappoints
Boris Kovacevic – Global Macro Strategist
US equity benchmarks ended another week at all-time highs, a feat the S&P 500 and Nasdaq have already achieved seven times so far this year. The stock market of the world’s largest economy has risen in all but two weeks since last November and have gained 25% over the course of the last four months. This achievement is even more impressive against this year’s trend of rising government bond yields and a resilient dollar. Some have attributed the bout of equity strength to the beginning of the global cutting cycle and the outperformance of the US economy. However, last week has been about inflation rebounding and policy easing expectations falling, while economic activity cooled. The Greenback and bond yields focused on the latter and fell on the week. Equities remained resilient and went into the weekend on stronger footing.
Last week saw the Fed’s preferred inflation (PCE) gauge reaccelerate by 0.4% on a monthly basis in January. This completed the trifecta of inflation beats last month (PCE, CPI, PPI) and postponed the markets expectation of the first rate cut by the Fed from May to June. The super core measure – services inflation excluding housing and energy – closely watched by Jerome Powell, increased by the most in almost two years. However, the disinflation in the annual inflation rates continued and we think that January has been skewed by on-off and yearly price setting effects, which will dissipate next month. This could be a time when markets start paying attention to macro data again. As we said, last week saw some serious downside surprised from the US economy in the form of durable goods, new home sales, consumer confidence and the PMI.
The US manufacturing sector shed jobs at the second fastest rate since 2020 in February with the employment sub-index dropping from 47.1 to 45.9. The manufacturing PMI fell to 47.8 and has been in negative territory for 16 consecutive months. The same month saw US consumer sentiment falter. The Michigan University’s consumer confidence index dropped from its preliminary reading of 79.6 to its final print of 76.9, which was the largest intra-month drop since the beginning of the pandemic. The disappointments on the macro side have pushed down the two-year Treasury yield by 15 basis points last week, the most since the second week of January. The US Dollar Index retraced its earlier PCE induced gains and recorded its second weekly fall in a row. This week’s non-farm payrolls report on Friday could give us further insight into the wellbeing of the US consumer. Job growth is expected to have decelerated from 353k in January to 200k in February.
Pound steady as Budget in focus
George Vessey – Lead FX Strategist
Last week, the British pound ended its longest daily winning streak against the US dollar since October last year and ended the week slightly lower as investors trimmed their bullish bets on the pound for the first time in eight weeks. GBP/USD struggled once again to hold above the $1.27 threshold and remains caught in an unusually tight 2% trading range between its 200- and 50-day moving averages. The 3-month implied volatility of GBP/USD also hit a 4-year low, reflecting the degree of investor complacency and the currency’s steady performance.
Even as the UK Spring Budget next Tuesday looms, markets are relaxed ahead of the event, a far cry from the conditions that prevailed during the Liz Truss fiasco in October 2022, which saw implied volatility spike to levels comparable to the Brexit vote and Covid shock. This caused an historical disconnect whereby UK gilt yields surged higher and the pound plunged, with GBP/USD clocking a record low under $1.05. We’ve since seen the pound recover to above $1.30 (July 2023), fall back to $1.20 (October 2023) and stabilise between $1.25-$1.28 over the past three months. This quiet period is highly unusual, but it also supports the pound given its high-yield appeal when it comes to carry trades. Will the UK fiscal event shake things up though? Most of the time, fiscal events like this don’t rock FX markets too much, but with a UK election on the horizon, the Chancellor could bring forward a relatively significant package of tax cuts despite limitations of increasingly tight fiscal forecasts.
UK Chancellor Jeremy Hunt recently warned that there is “a long path” ahead to cut Britain’s tax burden, which is currently the highest for 70 years. But fresh tax cuts could apply some upward pressure on yields, which are near 15 year highs already , and sizable cuts to income tax would add further incentive for the Bank of England to keep interest rates on hold a little longer.
Dovish ECB tilt could threaten EUR/USD recovery
Ruta Prieskienyte – FX Strategist
Euro staged a late recovery, starting the new month of a positive footing, as hotter-than-expected inflation print for the Eurozone gave the common currency a leg up against the US dollar in the final stretch of the week. The yield on the 10-year German government bund fell toward the 2.4% mark, down from the three-month high of 2.50% touched on Feb 29, as investors digested the subsequent monetary policy implications ahead of the ECB rate decision this week.
Inflation rate in the Eurozone slowed for a second month to 2.6% in February, but markets were expecting it to fall further to 2.5%. Meanwhile, the core rate eased to 3.1% from 3.3% while expectations were for a lower 2.9% reading. In addition, the bloc’s headline rate masks emerging country level differences, with German inflation falling more than expected while inflation in France and Spain came in hotter than market consensus. The figures reinforced the ECB’s cautious view on prematurely loosening monetary and investors are no longer expecting policy rate adjustments until the June meeting. Money markets are currently pricing in around 90bps cumulative rate cuts by year-end. As the ECB is expected to leave interest rates steady when it meets later this week, markets’ attention will turn to any insights about the timing of interest rate cuts and new economic forecasts. Even the slightest dovish tilt in the communication could hurt the common currency, which is already on shaky ground.
On weekly basis, EUR/USD remained broadly unchanged, posting only a marginal gain of 0.1% w/w to close above $1.0830 mark. Mid-last week the pair entered a slight bearish streak, thus further EUR/USD downside cannot be overruled especially given this week’s calendar is heavy on the US data front. A breach below $1.0800 could attract euro sellers and open the door for an extended slide towards $1.0760. On the upside, if we see signs of a slowdown in US economy or labour market, EUR/USD could be seen testing $1.0870 before the psychological barrier of $1.0900.
Crude oil benchmark surges over 4% in a week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: February 26 – March 1
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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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