February 02, 2024

“The rate cut guessing game continues after the Bank of England held its ground against market pricing yesterday, pointing to the evidence of remaining inflationary persistence. Non-farm payrolls should provide the next directional cue for the dollar after a risk rally dampened its demand.”

Tim Hallinan – Trading Director

Main Headlines

The anticipated strong recovery of European banks may face a setback, as both BNP Paribas and ING warned of a more challenging outlook. The lenders highlighted potential headwinds, and investors are reassessing which banks might be most vulnerable, especially as the boost from higher interest rates diminishes. Following disappointing results and adjusted targets, shares in BNP Paribas fell 8%, while ING forecasted lower income for 2024, leading to a decline in its stock price.

In January 2024, British manufacturing continued to face challenges, marking its 18th consecutive month of contraction, according to the S&P Global Purchasing Managers’ Index (PMI). The index for manufacturing inched up to 47.0 from December’s 46.2, showing a marginal improvement but remaining in contraction territory. The decline was attributed to reduced orders and disruptions in Red Sea shipping, causing delays in deliveries. A PMI reading below 50 indicates contraction in activity.

GBP

Sterling surged to around the highest levels reached this month yesterday as it tracked a rise in equities amid improving risk appetite. The Bank of England held rates at 5.25% with a three-way 2-1-6 vote split to hike, cut, or pause for the first time since 2008. The language became more balanced and dropped the bias towards further tightening, but the policymaker consensus argued that more evidence of disinflation was required. Unlike the ECB and the Fed, the BoE remains reticent to start discussing rate cuts amid concerns about inflation ‘persistence’ and a focus on unwinding second-round domestic inflationary dynamics, now that supply shocks have faded. Most interestingly, the updated inflation forecasts pointed to a sharp fall in headline inflation to 2% in Q2 before picking up and ending the year around 2.75% – this unusual scenario would suggest holding rates steady despite inflation reaching target, and then cutting whilst inflation rises.

EUR

The euro closed with significant gains yesterday after trading in a 1% range, buoyed by stickier-than-expected inflation and rallying risk conditions. Both the headline and core (excluding food and energy) measures printed 0.1% above the economist consensus at 3.3% and 2.8% respectively, slightly dashing hopes that the first cut will come as soon as April. The unemployment rate held steady at 6.4%. Elsewhere in Europe, EUR/SEK soared 1% at its highest level yesterday the Riksbank signalled that rate cuts could be brought forward to the first half of the year.

USD

With non-farm payrolls in focus for the dollar, the greenback has suffered this morning and is set for a weekly decline as investors rotate into riskier assets following upbeat earnings reports. Unemployment claims ticked up to 224k yesterday – the highest number since November – in a positive sign of a loosening labour market. But the January jobs report this afternoon will be the main market mover. Consensus looks for a 187k print after December’s stellar 216k figure, although many will also look to the revisions for January’s numbers, given that the majority of recent figures have been revised lower in the last year. A soft print here would likely please the Fed and give the greenlight for markets to price that March cut back in, tilting risks for the dollar to the downside today.

Markets

Impressive tech earnings from Meta and Amazon beat analyst forecasts yesterday, sending equities rallying in the US session yesterday. Nasdaq 100 futures were up 1% in Asia this morning, suggesting that this may have more room to run.

Main Economic Events (All Times CET)

8:45 a.m.: France Dec. Industrial Production
9:00 a.m.: Spain Jan. Unemployment Change
9:30 a.m.: ECB’s Centeno speaks
10:00 a.m.: Norway Unemployment
1:15 p.m.: BOE’s Pill speaks
2:30 p.m.: US Nonfarm Payrolls & Unemployment Rate
4:00 p.m. US U. of Mich. Consumer Sentiment
4:00 p.m. US Factory Orders, Durable Goods Orders

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