January 15, 2024

“The market’s expectations for rate cuts were reenergised last week, bolstered by softening producer prices in the US. UK CPI will give the final piece to the inflation puzzle for the major economies this week, and the expected decline in price growth is unlikely to tempt the Bank of England to ease their hawkish tone.”

Sam Cornford – Head of Trading

Main Headlines

According to a survey of top economists conducted ahead of the World Economic Forum’s annual meeting in Davos, the global economy is anticipated to face subdued growth prospects and uncertainty in the coming year. Factors contributing to this outlook include geopolitical strife, tight financing conditions, and the disruptive impact of artificial intelligence. The survey, which includes input from over 60 chief economists globally, revealed that 56% of respondents expect overall global economic conditions to weaken in the year ahead.

According to the London Employment Monitor by recruiter Morgan McKinley, job opportunities in London’s financial sector declined by nearly 40% in 2023. Factors contributing to the decrease include market turbulence and high inflation, leading employers to tighten their budgets. The report indicates a 38% decline in available finance jobs compared to the previous year, with the fourth quarter of 2023 experiencing the largest drop (42%) in job opportunities since the 2008 global financial crisis. The number of job seekers also declined by 16% during the same period.

GBP

A strong flow of data this week should jolt sterling out of its recent range-bound trading, after it ticked higher overall against both the dollar and the euro last week. In today’s only domestic release, a 1.3% pick-up in UK house prices this month is a positive sign for the property sector, but perhaps does little to move the dial for the British economy. Instead, investors’ interest will focus on unemployment claimant and wage growth data tomorrow morning ahead of CPI inflation on Wednesday, all of which should have cooled in December. The consensus for 3-month annualised average earnings growth is a decline from 7.2% to 6.9% which, while trending in the right direction, is very unlikely to prompt the Bank of England to tilt dovish and join the markets in its exuberant rate cut expectations. The number of unemployment claimants, meanwhile, should increase by 18.1k whilst the unemployment rate steadies at 4.2%.

EUR

The euro is drifting sideways this morning with Germany and Davos in focus for markets. German farmers are converging on Berlin today to protest shrinking subsidies amid a budget crisis, and GDP data this morning has illustrated a widely forecasted contraction of 0.3% in the German economy this year. Industrial output for the wider eurozone is likely to have contracted by the same percentage in November, although the dismal growth picture is well within market expectations. Later in the week, markets will likely brush off further pushback to an April cut and the 154bps priced into 2024 when ECB President Lagarde speaks several times this week at the World Economic Forum in Davos.

USD

Last week’s inflation data was largely mixed and, once fully digested by markets, ultimately revitalised the aggressive bets for Fed rate cuts and pushed the dollar lower. A spike in CPI inflation on Thursday was counterbalanced by a soft, contracting PPI print on Friday afternoon. On balance, the Fed’s preferred gauge – core PCE – is now estimated to be below 3% for the first time in almost three years, which sent front-end US Treasury yields plunging by 25bps as the probability of a March cut was ratcheted up to 79%. A US bank holiday puts the macroeconomic calendar on ice for today, but retail sales, unemployment claims, consumer sentiment data, and a raft of Federal Reserve speakers will keep markets busy throughout the rest of the week.

Markets

European stock futures climbed, and most Asian shares advanced as traders increased bets that the Federal Reserve will cut interest rates this year. The Euro Stoxx 50 rose by 0.4%, and contracts for US equities remained steady. Japan’s Nikkei index continued its ascent, having surged by 6.6% the previous week due to a weaker yen and improved growth prospects.

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

8:00am.: German Wholesale Price Index
11:00am.: Eurozone Industrial Production and Trade Balance
2:30pm.: Canadian Manufacturing Sales
4:30pm.: Bank of Canada Business Outlook Survey

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