January 08, 2024

“Inconsistency in the data muddied the economic picture for markets on Friday as uncertainty over the rates outlook for this year ramped up intraday volatility. UK GDP and US CPI are the key data releases this week, from which investors will hope for a clearer view.”

Tim Hallinan – Trading Director

Main Headlines

Top US congressional leaders have reached an agreement on a $1.6 trillion top-line federal spending level in an effort to prevent a partial government shutdown later this month, according to US House of Representatives Speaker Mike Johnson. The agreed-upon figure comprises $886 billion for defence and $704 billion for non-defence spending. Since last year, disagreements over the total amount of spending have impeded the House of Representatives and Senate appropriations committees from reaching consensus on the 12 annual bills needed to fund the government for the fiscal year that began on October 1.

According to a survey by the Recruitment and Employment Confederation (REC), British employers increased wages and displayed a partial recovery in their hiring enthusiasm in December. The Bank of England may interpret this as a further indication of ongoing inflationary pressures within the labour market. Although the survey indicated a continued reduction in the hiring of permanent workers in December due to employer concerns about the economy, the decline was less severe compared to November. Neil Carberry, Chief Executive of the REC, noted that the labour market’s slowdown appears to be easing, citing the positive sign amid the economic challenges.

GBP

Sterling has eased this morning after rising to a two-and-a-half-week high against the euro and making broad gains against the dollar on Friday. Further indications of unexpected resilience in the UK economy buoyed the pound last week, as services sector activity consolidated its advance into growth territory and the construction sector lifted from its lows. The sterling calendar starts slowly this week, giving investors time to mull over the implications of Friday’s mixed data signals for the global economy and to prepare for a critical GDP growth release on Friday for November, in which markets will be looking for confirmatory signals of the pickup in growth in the leading data.

EUR

The euro has steadied this morning after notching a 0.9% loss against the dollar in choppy trading last week. The USD leg dominated the volatile movements in EUR/USD as headline euro area data came in largely as expected. December CPI jumped slightly less than expected to 2.9%, but the overall steady disinflation scenario remained intact as the underlying core measure (excluding food and energy) fell to 3.4%. In today’s macro diary, markets will digest the Sentix investor confidence survey, followed by retail sales that are expected to signal further weakening in consumer spending, falling 0.3% in November on the previous month.

USD

The US dollar overall held on to its gains on Friday amid choppy intraday volatility as mixed signals in inflation and activity data left markets without clear direction. A significant positive surprise in the headline of the non-farm payrolls created some strength, with the US economy create a consensus-beating 216k jobs in December, suggesting that imminent rate cuts were unlikely in the context of a still tight labour market. But 71k in downwards revisions to previous data and declining private wage and salary workers dulled gains, worsened by a disappointing ISM services PMI figure of 50.6 that edged closer to contractionary territory, triggering swift losses that then tempered throughout the rest of the session. Markets currently see a 64% chance that rate cuts begin in March, with 134bps priced in for this year. The Fed’s Bostic will give his view on this year’s outlook when he speaks later, and consumer credit data should give an insight into the state of lending this evening. CPI inflation on Thursday will have the biggest market-moving potential this week, however, with investors looking for a clearer picture of the pace of disinflation.

Markets

Stocks in Asia faced declines, particularly in Hong Kong and China, driven by concerns about increased regulation in the gaming industry and doubts regarding the adequacy of the Chinese government’s measures to support the economy. The US 10-year Treasury yield maintained its position above 4%, following a rally on Friday that resulted from diminished expectations for aggressive interest rate cuts this year.

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

8:00am.: German Factory Orders and Trade Balance
8:30am.: Swiss CPI and Retail Sales
10:30am.: Euro Area Sentix Investor Confidence
11:00am.: Euro Area Retail Sales
6:00pm.: Fed’s Bostic Speaks
9:00pm.: US Consumer Credit

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