January 26, 2024

“In a hectic day for markets yesterday, a dovish ECB meeting and a huge positive surprise for US GDP sent the euro and the dollar in opposite directions. Core PCE today will draw a lot of attention as traders look to fine-tune their pricing for that first rate cut.”

Tim Hallinan – Trading Director

Main Headlines

US President Joe Biden announced a $5 billion investment in transportation projects during a visit to Wisconsin on Thursday, emphasising economic initiatives in a key state ahead of the 2024 election. The visit included a $1 billion investment to replace the Blatnik Bridge, a critical link between Wisconsin and Minnesota. Despite efforts to address concerns about rising consumer prices, Biden faces challenges in the polls, trailing likely Republican challenger Donald Trump in the upcoming presidential election on November 5.

British consumers are experiencing their highest level of confidence since January 2022, with lower inflation contributing to an improved outlook on their finances, according to a survey. The GfK consumer confidence index increased from -22 in December to -19 in January. This positive sentiment may provide a boost for Prime Minister Rishi Sunak ahead of an anticipated national election later this year.

GBP

Sterling has edged lower against a strong dollar but notched a near five-month high against a falling euro yesterday afternoon. The uptick in consumer confidence to a two-year high reflects an improving inflation outlook and prospects for rate cuts this year, something that is increasingly being mirrored in the economic activity data. The domestic diary has closed out for the week in the UK, giving investors time to digest key US inflation data this afternoon ahead of the Bank of England’s policy decision next Thursday.

EUR

Dovish expectations for the ECB flared up yesterday, plumbing the euro to its lowest level since mid-December. The hold at 4.0% was thoroughly unsurprising, but tweaks to the language – particularly from Lagarde in the press conference – sent short-term Bund yields sliding 10bps, and the priced probability of an April cut edged up to 80% from 60%. A mention of the importance of strong wage growth was dropped, and the bank in general appeared to be more convinced that inflation would head in the right direction in the coming months. Lagarde openly said that she stood by her comments in Davos last week that signalled a potential summer cut, and this time drew attention to the downside risks to inflation.

USD

A sliding euro and a huge beat on US GDP have set the dollar index up for a fourth consecutive weekly gain this month. At times during the fourth quarter, the Atlanta Fed’s GDPNow estimate fell as low as 1.3%, and so it is no surprise that the immense 3.3% figure was higher than any of the 87 analyst responses in a Reuters poll. The consumer spending binge that drove US growth to 4.9% in Q3 only moderated, rather than fizzling out as many had expected. The positive impact for the dollar was dulled, however, by the GDP deflator price index, which indicated price growth of only 1.5%. The Fed’s preferred measure of inflation – the core PCE index – is the biggest market impulse today. A drop from 3.2% to 3.0% is the consensus estimate for December, which is 0.9 percentage points lower than the median Fed projection in the June meeting. A downside surprise would likely revitalise the rate cut bets that have been trimmed throughout this month.

Markets

The S&P 500 clocked its fifth successive record closing high as upbeat GDP data propelled hopes for a soft landing. In Asia, however, shares have declined this morning, as enthusiasm about China’s rescue measures diminished.

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

8:00am.: German GfK Consumer Climate
9:00am.: Spanish Unemployment Rate
10:00am.: Eurozone Private Loans and M3 Money Supply
2:30pm.: US Core PCE
4:00pm.: US Pending Home Sales

Corporate Events

Earnings include American Express, Colgate, Volvo.

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