February 05, 2024

“A dramatic repricing of the Fed’s interest rate path followed some extremely strong jobs data out of the US last week, dealing the final blow to the market expectation for a March cut. This quarter continues to represent a retracement of December’s rate-cut euphoria.”

Tim Hallinan – Trading Director

Main Headlines

In December, German exports experienced a sharper decline than anticipated, with a 4.6% decrease compared to the previous month, according to data from the federal statistics office. This outcome surpassed the forecasted 2.0% decrease in a Reuters poll. Exports to EU countries registered a 5.5% drop from the previous month, while exports to countries outside the EU decreased by 3.5%, reflecting weak global demand.

The Office for National Statistics in Britain reported on Monday that the unemployment rate late last year was significantly lower than previously estimated. The re-weighted survey results indicated an unemployment rate of 3.9% for the three months ending in November, as opposed to the 4.2% figure provided by the ONS on a temporary, experimental basis last month. This new data may contribute to the Bank of England’s caution about rapidly reducing interest rates.

GBP

A strong weekly gain against the dollar was scuppered by a strong US jobs report on Friday. Sterling slumped 1.1% in the aftermath of the release but eked out a small weekly gain against the euro. The US data is likely to continue to dominate for the pound this week, with the final services PMI the only domestic data input today after an impressive 53.8 print in the first estimate, well above the 50.0 mark denoting an expansion in activity. BoE Chief Economist Pill talks later this afternoon and a speech by Catherine Mann will attract attention on Thursday, given her vote to hike rates last week.

EUR

The euro slipped below a key level to an 8-week low this morning against the dollar as the US growth and yield advantages continue to rewiden. The single currency has tracked receding US rate cut expectations downwards this year, having now reversed its December rally. Further confirmation of a stagnant eurozone economy should come this morning, after figures from Spain and Italy earlier showed again that it is Southern Europe propping it up while Germany and France continue to drag. The Sentix investor confidence survey should then show some marginal improvements when it prints soon after.

USD

A blowout jobs report revived the US economic exceptionalism narrative on Friday and sparked a repricing of the Fed policy path that quashed the March cut and propelled the US dollar. The 353K non-farm payrolls print landed at almost double the economist consensus, while the previous figure, which was already exceptional, was revised up to 333K. This filled Powell with confidence ahead of a CBS interview last night, where he acknowledged that this historically unusual resilience affords the Fed the ability to be ‘prudent’, allowing policymakers to hold back and gain confidence before flicking the switch to policy easing – the market-priced probability for a March cut slumped to 15% as a result. The next key input for the greenback is today’s ISM services PMI, which is expected to show a renewed resurgence in activity in the sector.

Markets

Treasury yields climbed and Wall St equities rallied on the strong US jobs data. The S&P 500 notched a fresh high as it completed its 13^th week of gains over the past 14 weeks.

Main Economic Events (All Times CET)

9:15-10:00am: Euro Area Final Services PMIs
10:30am: Euro Area Sentix Investor Confidence
10:30am: UK Final Services PMI
11:00am Euro Area PPI
3:45pm: US Final Services PMI
4:00pm: US ISM Services PMI
8:00pm: Fed’s Bostic speaks

Corporate Events

100 of the S&P 500 companies report earnings this week. Today’s releases include McDonald’s, Caterpillar, and Mitsubishi.

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