February 19, 2024

“A resurgence in US economic exceptionalism was bolstered by strong inflation data in January last week, propelling the dollar higher for the fifth consecutive week. Now it is PMI week, where we will look for the latest update on the health of the US, UK, and euro area economies.”

Sam Cornford – Head of Trading

Main Headlines

There is widespread anticipation that China will reduce its benchmark mortgage reference rate during its monthly fixing on Tuesday, leveraging banks’ improved net interest margins to implement monetary stimulus and bolster the struggling economy. The loan prime rate (LPR), typically applied to banks’ premier clients, is recalculated monthly based on proposals from 20 designated commercial banks submitted to the People’s Bank of China (PBOC). The majority of new and existing loans in the world’s second-largest economy are tied to the one-year LPR, which currently stands at 3.45%.

In a shift signalling a potential stabilisation in the housing market, the latest data from property website Rightmove reveals that home prices in Britain have seen their first annual increase in six months. Strengthening demand from buyers has contributed to a 0.1% rise in asking prices for homes in February compared to the previous year, marking the first uptick since August 2023. This trend comes amidst declining mortgage interest rates, fuelled by expectations of potential rate cuts by the Bank of England in the coming year.

GBP

Strong retail sales data winched up sterling modestly at the end of a damaging week, but few were willing to trade significantly on the result given that the monetary policy outlook was little changed. The pound ultimately ended the week a leg lower, however, as a soft CPI print outweighed some strong wage growth and spending data, although the market expectation for cuts from the Bank of England still fell to 64bps as pricing was scaled back across developed markets. The PMIs on Thursday will give investors their biggest trade opportunity for sterling this week, where yet further improvement in the activity data is expected. Tomorrow’s public sector borrowing data will also be key ahead of Hunt’s spring budget.

EUR

The euro held its ground against the dollar and crept higher against sterling last week amid a lack of domestic data. This week similarly starts quietly, with investors looking first to the ECB’s wage growth survey tomorrow for hints towards the broader April data, upon which many policymakers have placed strong emphasis in terms of rate cut timing. The consensus anticipates a further uptick in the contractionary PMI data on Thursday, as the bloc lifts away from its growth trough reached later last year.

USD

Hot inflation beats in the CPI and PPI data propelled both Treasury yields and the dollar last week, as the new year drive to shrink stretched rate cut bets continues to be the path of least resistance in financial markets. The cross-read from these figures puts expectations for month-on-month core PCE inflation – the Fed’s favoured gauge – in the 0.4-0.5% range after markets previously looked for 0.2%. One set of data does not define a trend, of course, but chances are growing of a potential resurgence in price pressures that weakens the disinflationary narrative if the price data does not revert to the expected path next month. Markets are closed today but the FOMC meeting minutes on Wednesday will be scanned for clues on policymaker criteria to initiate rate cuts, and investors are looking for a softening in the PMI data on Thursday.

Markets

With US markets shut and China returning from its Lunar New Year holiday, the focus was on a potential rally in Chinese stocks that never came, despite boosted spending over the holiday period that beat pre-covid levels as policymakers battle weak demand and deflationary concerns. Japan’s Nikkei jumped 4.3% as foreign buyers continued to snap up cheap equities, and a huge earnings release from Nvidia should trigger some volatility as the AI giant faces a test of its huge 96 P/E ratio.

Main Economic Events (All Times CET)

1:00am: UK Rightmove HPI
12:00pm: German Bundesbank Monthly Report
US holiday for Presidents’ Day

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