January 04, 2024

“The new year unwinding of rate cut expectations for 2024 has eased alongside the dollar’s bullish momentum, affording sterling and the euro some space to claw back some losses this morning. US central bankers added little clarity to the picture in the minutes of December’s meeting last night – investors will be keen to digest eurozone CPI figures and US payrolls data for fresh market direction.”

Tim Hallinan – Trading Director

Main Headlines

A private-sector survey revealed that China’s services activity expanded at the fastest pace in five months, driven by a solid increase in new business. This contributed to an increase in optimism within the sector to a three-month high. The survey results provided a contrasting view to an official survey released at the weekend, which indicated a contraction in a sub-index of services activity at the end of 2023. The private-sector survey suggested that robust new business growth, the fastest since May, played a role in the sector’s improvement, attributed to increasing customer numbers and spending.

In contrast to the more pessimistic IoD confidence index referred to yesterday, a survey by the British Chambers of Commerce (BCC) revealed that British companies are somewhat more optimistic about sales growth in the upcoming year after experiencing a largely flat 2023. The BCC reported that 56% of respondents anticipate turnover growth over the next 12 months, up from 53% in the previous survey conducted three months ago. However, the survey also indicated caution regarding investment, as only 24% of firms reported an increase in investment over the previous three months in November, while 58% stated no change, and 19% reported a decrease.

GBP

Sterling is edging higher this morning after it clawed back some losses against both the dollar and the euro in yesterday’s session.  UK yields broadly stayed firm, as those in the US pulled back slightly after surging in the first trading day of the year. The lack of domestic catalysts this week finally eases this morning with a series of data that includes the final services PMI, mortgage approvals, and consumer lending. Mortgage approvals are expected to have been broadly stable in November, whilst consensus points to a £1.6bn net increase in consumer debt levels in the same period, the highest since August but still well below pre-pandemic levels. Fresh impulses for GBP/USD and GBP/EUR are more likely to come from critical data from its European and US counterparts, however.

EUR

The euro has strengthened around 0.4% from its two-week low reached yesterday afternoon, ahead of critical CPI inflation data. French preliminary CPI printed at 3.7% in December this morning, ticking up slightly from November’s 3.5% figure as expected due to energy base effects. As usual, the German figures are released by region throughout the morning before the consolidated data is released in the early afternoon. A string of final services PMIs is interspersed between the inflation data, providing investors with a rounded assessment of the current outlook for economic growth and inflation amid a market focus on the pace and timing of rate cuts this year. Current market pricing foresees 170bps of total easing this year, with a 60% chance that this begins in March – euro area CPI tomorrow morning may dent these hopes.

USD

The dollar notched further gains yesterday against a broad basket of currencies, as unsurprising job openings figures and a mixed set of FOMC meeting minutes posed little challenge to its new year momentum. Labour demand eased broadly in line with the market’s soft-landing expectations – job openings fell for the third straight month to their lowest level since March 2021 at 8.79 million, although they still remain well above pre-pandemic levels. Federal Reserve policymakers signalled both hawkish and dovish inclinations in the minutes of December’s policy meeting, expressing wide agreement that inflation was coming under control as well as concern that exceedingly restrictive monetary policy could cause unwanted economic damage, whilst also hinting that the easing of financial conditions in the financial markets may demand a high-for-long rate path. Whichever signals investors focused on, there was no indication that a rate cut was imminent, suggesting that March rate cut bets are likely an overstretch. ADP non-farm payrolls and unemployment claims give further clues on the evolution of inflationary pressures in the labour market this afternoon, but it is the non-farm payrolls figure tomorrow that looms large over the financial markets.

Markets

European stock futures saw a slight increase following a late recovery in Asian shares, overturning earlier declines triggered by Federal Reserve meeting minutes indicating that interest rates would stay elevated for an extended period. The Euro Stoxx 50 contract rose by 0.2%, aligning with gains in its US counterparts. On Wednesday, the S&P 500 closed 0.8% lower, extending a series of daily declines that started on the final trading day of 2023. The Nasdaq 100 experienced a 1.1% drop, marking the fourth consecutive daily decline and the longest losing streak in two months.

Main Economic Events (All Times CET)

2:45am.: Chinese Caixin Services PMI
8:45am.: French Prelim CPI
10:00am.: Eurozone Final Services PMI
10:30am.: UK Final Services PMI, Mortgage Approvals, and Net Lending to Individuals
2:00pm.: German Prelim CPI
2:15pm.: US ADP Non-Farm Employment Change
2:30pm.: US Unemployment Claims
3:45pm.: US Final Services PMI

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