January 25, 2024

“Business activity continues to show signs of a pickup in the UK and US, and we should get a firmer confirmation of a resilient US economy in the first GDP estimate for Q4 this afternoon. Meanwhile in Frankfurt, the ECB should hold steady in its first policy decision of the year, where investors will look for clues on the first rate cuts.”

Sam Cornford – Head of Trading

Main Headlines

Farmers in France staged road blockades across the country on Wednesday to protest against the government’s push for lower consumer prices and stricter environmental regulations. Many farmers argue that their financial stability is at risk as food retailers intensify efforts to reduce prices in the face of high inflation. The protests come after similar farmer unrest in Germany, Poland, and Romania. President Emmanuel Macron’s government had already withdrawn a controversial draft farming law in response to concerns.

The UK’s car production achieved its highest growth rate since 2010 in the past year, benefiting from a reduction in chip shortages and other supply chain challenges. According to the Society of Motor Manufacturers and Traders (SMMT), a total of 905,117 cars were produced in the country in 2023, representing a 16.8% increase compared to the previous year.

GBP

Sterling leapt to a near two-week high yesterday as the UK’s growth outlook inched further into expansionary territory. In yet more evidence that the British economy is set to outperform in Europe this year, the composite PMI index edged up to 52.5, with a healthy margin above the 50.0 mark that separates contracting and expanding economic activity. The pound enjoyed a 0.5% lift immediately after the release, as traders revised up prospects for growth and pushed back their assumptions for the Bank of England’s interest rate policy path, ahead of the bank’s first meeting of this year next Thursday. With the macro diary limited to sales data from the Confederation of British Industry, sterling is likely to be led by the EUR and USD legs of its major pairs today.

EUR

The euro recovered yesterday from Tuesday’s slide to a 5-week low, buoyed by rising risk sentiment and signs of a bottoming out in the eurozone’s economic woes. A boost from news in China that its reserve requirement ratio for banks will be slashed, injecting $140bn in liquidity into the Chinese economy, propelled the euro alongside the best composite PMI print since July at 47.9. Few in the financial markets are expecting the ECB meeting this afternoon to be a significant gamechanger – a certain policy hold would normally focus attention onto policymaker cues about their future direction but, given the raft of speeches last week at Davos, they have likely gotten it off their chests already.  That said, a formal mention of the potential summer cut that Lagarde talked about could push the euro towards a 2024 low. More likely is further pushback against market pricing and an emphasis on data dependency and upside risks that precludes rate cut discussions until inflationary pressures have fully begun to subside.

USD

The dollar nursed losses for most of yesterday’s session as other developed markets economies posted impressive economic indicators, but recouped much of them later in the day when the market consensus again underestimated the resilience of the US economy. The 52.3 PMI print was the highest in seven months, which bodes well for the hotly anticipated Q4 GDP growth figure due this afternoon. The consumer binge that triggered Q3’s colossal 5.2% annualised rate of growth is expected to have moderated in the fourth quarter, as the last of the pandemic savings was spent and high borrowing costs continued to bite, but economists still look for a healthy 2.0% print whilst the large European economies risk recession. Unemployment claims accompany the report at 2:30pm CET and should remain resilient as it continues to hover around 200k.

Markets

MSCI’s world equities index hit its highest level in almost two years yesterday on the back of positive earnings reports, upbeat economic data, and the announcement from China that the reserve requirement ratio would be slashed. The Shanghai Composite rose 3% in its largest gain in nearly two years. The S&P 500 hit a fresh all-time high late in the afternoon but closed down on the day, dragged by a slump in Tesla share.

Main Economic Events (CET)

1:30am.: Reserve Bank of Australia Bulletin
2:15pm.: ECB Monetary Policy Statement
2:30pm.: US GDP and Unemployment Claims
2:45pm.: ECB Press Conference
3:00pm.: Belgian NBB Business Climate
4:00pm.: US New Home Sales

Corporate Earnings

Earnings include Visa, LVMH, Intel, T-Mobile, Comcast, and Blackstone

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