February 3, 2023

“The Bank of England and the European Central Bank raised interest rates by 50bps yesterday and stated their intention to carry out similar increases next month, as inflation continues to increase. The focus is now on the January jobs report in the US later today. Investors are expecting US Nonfarm Payrolls jobs to grow by 185,000 in January, following a surprising increase of 223,000 in December.”

Tim Hallinan – Trading Director

Main Headlines

A recent report from AM Best has warned that the chance of the US economy entering a recession in the next 12 months is growing. This is due to the expectation of a slowdown in economic activity in 2023 and the Federal Reserve’s likely continuation of its monetary policy tightening measures. The report states that despite a sluggish beginning, the economy in the US demonstrated remarkable resilience in 2022. However, it also notes that during the first half of 2022, the economy faced a technical recession with a contraction of 1.6% in Q1 and 0.6% in Q2.

The Chief Economist at the Bank of England, Mr. Huw Pill, emphasised the significance of avoiding an excessive rise in borrowing costs in a statement made this morning. This statement was issued in response to the recent indication provided by the BoE, indicating that it is nearing a pause in the ongoing sequence of interest rate hikes which commenced in December 2021. The Bank of England raised interest rates to 4% yesterday, the highest level since 2008. Despite this increase, the bank removed previous language regarding their readiness to take strong actions to curb inflationary pressures if required.

GBP

Sterling is weaker than most major currencies in the early morning trade. The Bank of England’s latest interest rate hike, the 10th consecutive increase, has signalled a change in its approach to combating high inflation. The move prompted investors to anticipate the end of the continuous series of higher borrowing costs. The central bank raised its key rate by 50 basis points to 4%, however, despite raising its key interest rate, the central bank is apprehensive about exacerbating the predicted worst recession among major developed economies this year. This resulted in a significant drop in the value of the pound.

EUR

Euro is stronger against sterling and weaker against the dollar this morning. The euro declined against the US dollar yesterday following the widely anticipated 50 basis point interest rate hike by the European Central Bank. The ECB has scheduled a minimum of one more interest rate increase of the same magnitude for next month and stated that it will then assess the future direction of its monetary policy. The central bank’s statements were seen as dovish by some, leading to the perception of a shift towards a more cautious approach by central banks globally.

USD

The dollar is well bid against most major currencies overnight. The US dollar slightly increased this morning, maintaining its upward momentum from the previous session after a series of decisions made by central banks in Europe. Market activity was modest as investors awaited the release of the latest US employment data which could influence the policy decisions of the Federal Reserve. The release of the US nonfarm payroll data is a crucial event for markets later today. It is anticipated that the US economy will have added 185,000 jobs in January. Although this figure represents a robust performance, it is lower than the 223,000 jobs added in December. The release of wage data is also imminent.

Markets

This morning, European stock markets experienced a decline as investors processed recent central bank decisions, economic statistics, and corporate earnings reports. The pan-European Stoxx 600 index experienced a decline of 0.4% during early trading, with the automotive sector being the largest contributor to the losses, declining by 1.1%. All industries and major stock exchanges recorded negative results. US stock futures showed a decline in early premarket trading following the release of disappointing results from Apple and Alphabet (Google’s parent company) for their December quarter. Both companies failed to meet expectations in terms of revenue and profits, leading to a decrease in the value of tech stocks.

Main Economic Data/Central Banks/Government (All Times CET)

7:00 a.m.: Russia Jan. S&P Global Services PMI
8:00 a.m.: Turkey Jan. CPI; PPI
8:45 a.m.: France Dec. Industrial Production
9:15 a.m.: Spain Jan. S&P Global Services PMI
9:45 a.m.: Italy Jan. S&P Global Services PMI
9:50 a.m.: France Jan. S&P Global Services PMI
9:55 a.m.: Germany Jan. S&P Global Services PMI
10:00 a.m.: Eurozone Jan. S&P Global Services PMI
10:00 a.m.: EC Survey of Professional Forecasters
10:00 a.m.: Norway Jan. Unemployment Rate
10:30 a.m.: UK Jan. S&P Global Services PMI
11:00 a.m.: Eurozone Dec. PPI
11:00 a.m.: Czech National Bank presentation
1:15 p.m.: BOE’s Pill speaks
2:45 p.m.: ECB’s Visco speaks
Ukraine and the European Commission hold a summit to discuss Kyiv’s integration in the bloc

Corporate Events

Earnings include Sanofi, Skanska, Regeneron, Cigna

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