European markets were more nervous last week ahead of the ECB and MPC policy meetings this week. Conversely, US markets built on gains so far this year with impressive moves for the main indices, especially the NASDAQ which powered ahead with gains of just under 5%.
Without doubt this week is key for global markets with three important central banks deliberating over further rate rises. Optimism has picked up in the first 4 weeks of this year as inflationary pressures continue to abate more than forecasts with natural gas prices continuing to fall in both Europe and the US, where for the first time ever US gas went into storage because of the lack of any winter weather that dominates the energy consumption at this time of year.
Review of last week’s key action
FTSE -35 -0.45% DOW 603 +1.8% S&P +98 +2.46% NASDQ +558 +4.8% DAX +55 +0.36% NIKKEI +550 +2.04% Hang Seng +444 +2%
European markets were mixed last week with the FTSE100 down 0.45% whilst Germany’s DAX registered a modest gain of 0.36%.With key interest rate decisions this week for the US, UK and the Eurozone, European markets were left considering further interest rate rises this year that will eclipse those from the Federal Reserve.
The Fed is expected to raise rates by 0.25% this week, following a series of aggressive rates rises that have seen the Fed Funds rate increase by 3% over the past four meetings. Market expectations are for US rates to top out at 4.75% - 5% with a possibility of a cut of 0.25% or 0.5% by year-end.
Here in the UK, we are expecting the MPC to raise rates by 0.5%, or an outside chance of 0.25% hike. Interest rates are expected to peak in the UK at 4.6% which means an average expectation of 1.1% in further rate rises. In the Eurozone rates have further to go with rate rises of 1.4% factored in. Markets are expecting the belatedly hawkish ECB to raise rates by 0.5% this month is the face of persistent core inflation, with a further two 0.25% following on in subsequent meetings.
Data last week did little to sway the markets’ optimism about the path of US interest rates. It’s perhaps this optimism that counts against the markets insofar as the Federal Reserve could disappoint with its dot-plot on future rates rise expectations. US manufacturing and services PMI data was better than expected but still well below the 50 level which marks out contraction from expansion in these sectors.
Core durable goods were as expected whilst the first reading of GDP data from Q4 2022 suggests growth was better than expected although this historical data has little impact on expectations for future growth.
The key PCE data that is the Federal Reserve’s preferred measure of inflation rose 4.4% from a year ago down from the 4.7% reading in November, its smallest annual increase since October 2021. The core PCE increased 0.3% which was in line with the consensus. So overall the Federal Reserve will be comfortable with the continuing slowdown in the rate of inflation which will mean that a rise of 0.25% is the overwhelming outcome from this week’s FOMC meeting although the persistence of Core Inflation could give the Fed more to think about in the coming weeks.
Far East markets had a very shortened week with the Hang Seng open Thursday and Friday whilst mainland China was closed all week for the Lunar New year celebrations. Chinese markets will likely play catchup Monday following gains in US and Hong Kong markets.
EURUSD unchanged GBPUSD unchanged USDJPY +0.22 +0.17%
The US Dollar lost a little ground last week with forex markets waiting for the outcome of this week’s key interest rate policy meetings.
Sterling’s moves reflect the tougher challenges here in the UK although most action was sideways with little movement in Sterling’s value against both the US Dollar and the Euro.
The political backdrop continues to undermine PM Sunak from making much progress on key policies as the Chairman of the Conservative Party, Nadim Zahawi, was sacked for a breach of the ministerial code over his tax penalty and late payments to HMRC.
Gold unchanged UK OIL -1.37 -1.56% US OIL -2.39 -2.92% Bitcoin +888 +4%
Gold confirms again that its fortunes remain wedded to the US Dollar. With major currencies unchanged versus the US Dollar, it’s not surprising Gold was little moved.
Oil fell back last week by $2 following gains since January 10th. The opening up of China is expected to have a profound effect on oil demand and demand for other commodities such as copper and natural gas. The problem is that the path of growth is not certain as China is still battling waves of Covid infections which means businesses cannot operate at full capacity yet.
Bitcoin continues to gain ground since the end of the first week of January as retail interest pushes Crypto higher whilst the negative news is off the front pages.
Data / events for the week ahead
A very busy schedule this week with three key interest rate decisions and also the non-farm employment change. This week will define market direction over the coming month – Lets hope the members of the FOMC, ECB and the bank of England’s MPC don’t disappoint. Remember the FOMC were a littler late to the party in raising rates so they may want to sound hawkish to ensure that their message hits home and so that markets do not get ahead of themselves.
No data of note.
US - Chicago PMI. A modest improvement. Nothing to get excited about.
Eurozone - Core CPI flash estimate. A slight decline expected. EUR, Eurozone equities sensitive.
OPEC - OPEC - JMMC Meetings
US - ISM Manufacturing PMI. Manufacturing sector has struggled with the repaid rises in interest rates. Expect a slight decline.
US - FOMC policy meeting. Committee is expected to announce a slowdown in rate rises with a smaller rise of 0.25%. The optimism or complacency could be summed up by the move in bond markets this year, with US 10-year yields falling from 3.925 to 3.51%, one of the biggest moves for many years. The soft landing for the US economy remains a pre-occupation of the markets but the Fed’s only focus is on controlling prices. Press conference at 7.30pm could be lively for the markets. USD, global equities, Bonds and commodities all highly sensitive to this rate decision.
UK - The second major central bank policy meeting from the MPC, the rate setting committee of the bank of England. Whilst the least important of the three major central banks deliberating, the expected rate rise of 0.5% and accompanying remarks will set the tone of UK and other major markets for the coming weeks as interest rates are ratcheted higher in Europe. Watch out for further split in the vote as some economists are arguing for a smaller 0.25% hike. GBP, UK equities and Gilts all highly sensitive.
Eurozone - The final major central bank policy meeting this week, with the ECB announcing its next move in interest rates which is widely expected to be a hike of 0.5%. The ECB was late to raise rates last year, with President Lagarde suggesting this time last year that the ECB was unlikely to raise rates at all in 2022. Well we all know that this call was wrong anyway but the war in Ukraine changed central bank thinking, including the dovish ECB rate setting committee. ECB press conference 30 minutes after the announcement and also a podcast 1 ½ hours after that explaining the decision. Euro, EU equities and bonds all highly sensitive to this release.
US - In a week of three key rate decisions we also have the US Non-farm employment change which in a less busy week would be keenly anticipated. By the time this release comes round the markets would have absorbed all the statements and moves in interest rates so it’s unlikely this release will cause much of a stir, unless the data misses consensus by a wide margin. Expect non-farm jobs to have increased by 193K following 223k in January. The unemployment rate remains almost at its record low, something the Federal Reserve is very aware of as it attempts to keep the lid on core inflation. USD, equities, and bonds sensitive but likely de-sensitised somewhat since following the barrage of central bank policy announcements.
US - ISM Services. A big disappointment last month should see the ISM Services recover above the important 50 level which separates contraction from expansion.
US - Earnings. 30% of the market cap of the S&P500 releasing their Q4 results this week. Tech is transitioning to the post-pandemic world where growth is more challenging. Results may not be that bad, but many tech giants are giving disappointing guidance which is key to markets.
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