January 16, 2024

“Yesterday’s renewed reassessment of the rate cut outlook translated into a broad dollar move upwards as hawkish ECB commentaries drove a general hawkish repricing of the rate paths in major economies. Cooling UK wage growth has dragged sterling even lower this morning.”

Tim Hallinan – Trading Director

Main Headlines

German Finance Minister Christian Lindner faced farmers protesting against tax increases yesterday to say that there was no additional funding available for further subsidies. The demonstration, which brought Berlin to a near standstill, involved thousands of farmers with trucks and tractors filling a central avenue. The protests emerged following the government’s decision to phase out a tax break on agricultural diesel as part of efforts to balance the 2024 budget after a constitutional court ruling forced a revision of spending plans.

A PwC pre-Davos survey revealed that global executives are growing increasingly concerned about the long-term viability of their businesses. More than 4,700 CEOs participated in the survey, and 45% of them expressed doubts about their businesses surviving the next ten years without significant changes. The executives are particularly worried about the impact of generative AI and climate disruption. The majority of CEOs anticipate the need for new skills training for employees due to AI, and many voiced concerns about cybersecurity risks, misinformation, and bias towards specific groups of customers or employees.

GBP

Although relatively stable on the crosses, sterling slipped overnight against the dollar in a broad risk-off move, dragged further by a sharp cooling in wage growth in the three months to November that bolstered the prospects of rate cuts this year. Growth in the average earnings index fell from 7.2% to 6.5% versus a 6.8% consensus whilst job vacancies contracted for the 18^th consecutive period. This amounts to a real terms wage increase above inflation of 1.3%, which should be constructive for British economic activity in the coming months. Despite data quality concerns, the closely watched report underscores a continued easing of inflationary pressures that the Bank of England will welcome, but its immediate impact has been limited to a 0.1-0.2% move given the higher importance placed upon tomorrow morning’s CPI figure – ultimately it is the wider market narratives that are guiding the pound this morning.

EUR

The euro has made broad gains against the majors despite a 0.5% slump against the dollar overnight. A chorus of hawkish ECB policymakers knocked the optimistic rate cut outlook yesterday, as comments from Holzmann and Nagel fuelled worries that the markets have priced too aggressive a rate cut path for the major central banks. In contrast to the six cuts expected by markets to begin in spring, both argued that 2024 rate cuts cannot be guaranteed, with Nagel all but ruling out near-term cuts and suggesting the summer might be more reasonable. President Lagarde will give her view tomorrow, but for now, the ZEW economic sentiment survey is likely to have fallen slightly this month as markets roll back slightly on the rate cut euphoria of late 2023.

USD

Dwindling risk sentiment and broad dollar strength has rocketed the index to a one-month high overnight. Having reflected on the ECB commentaries in Davos, a hawkish repricing of the Federal Reserve’s rate path, combined with some safe-haven demand from concerns in the Middle East, has propelled the greenback ahead of a key speech by the Fed’s Waller this afternoon. Waller’s November speech entitled ‘Something appears to be giving’ – referring to the resilient US economy beginning to soften and allow for disinflation – caused a stir and sent the dollar plummeting after he became the first Fed policymaker to openly discuss cuts with the immensely dovish claim that rate cuts could come within months. The dollar could easily move a leg lower if he repeats this rhetoric, particularly given his assumed close thinking to Chair Powell.

Markets

European and US equity futures declined along with Asian stocks on Tuesday, dragged by hawkish comments from the European Central Bank, which countered expectations of early and extensive rate cuts. The Japanese Nikkei 225 rose for its sixth consecutive session to reach a fresh 34-year peak.

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

8:00am.: German Final CPI
8:00am.: UK Claimant Count Change and Average Earnings Index
11:00am.: ZEW Economic Sentiment Survey
2:30pm.: Canadian CPI
2:30pm.: US Empire State Manufacturing Index
4:00pm.: BoE Governor Bailey speaks

Corporate Events

Earnings calls include Morgan Stanley and Goldman Sachs.

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