January 29, 2024

“With market focus on the pace and timing of rate cuts, a bumper week sees the first policy meetings of the year for the Federal Reserve and the Bank of England. Both should hold steady, but eyes will be on shifts in the policy language that may signal their intentions this year.”

Tim Hallinan – Trading Director

Main Headlines

A Hong Kong court has ordered the liquidation of China Evergrande Group, the world’s most indebted property developer with over $300 billion in total liabilities. The decision comes after Evergrande failed to present a concrete restructuring plan more than two years after defaulting on a bond repayment. This move is expected to have significant implications for China’s financial markets as authorities work to manage the deepening crisis.

Public expectations for inflation in the UK, particularly in the short term, have fallen, according to a survey by Citi and YouGov. The survey indicates that expectations for inflation over the next 12 months dropped from 4.2% in October to 3.5% in December. Inflation expectations are a crucial input into inflation itself, as it drives pricing mechanisms and wage negotiations.

GBP

Sterling’s outperformance is becoming an outlier in the G10, having remained flat on the bullish dollar this year and up strongly on the major crosses. A lack of dovish commentary from the Bank of England and inflation prints that remain higher than its major neighbours have sustained the pound’s strength while many in the G10 have weakened considerably. Thursday’s monetary policy decision is the most obvious risk event coming up, where sterling could begin to soften if a hawkish bias is dropped and pushback against aggressive cut expectations is eased. Markets continue to price in the first cut for June, following the ECB in April and the Fed in May.

EUR

The euro is down 2% against the dollar this year, hovering around levels reached during the dip triggered by the ECB decision last Thursday when Lagarde appeared to be more convinced about the downtrend in euro area inflation. The economic calendar is muted today as market attention turns to CPI and GDP data this week. A technical recession should be confirmed as expected tomorrow morning, and CPI should ease further on Thursday to 2.7% as energy base effects that sparked a resurgence in December subside. The Chinese PMIs in the early hours of Wednesday will also hold a lot of weight for the euro, given its insight into a critical source of foreign demand for the euro area economy.

USD

The US dollar notched a fourth consecutive weekly gain on robust economic data that continues to signal a soft landing for the US economy. The slightly softer-than-expected 2.9% core PCE print was the lowest since March 2021, but a lack of weakness in the wake of the release suggests a prior expectation that risks were tilted to the downside. While European economic data remains weak, the US data is falling perfectly within the ‘goldilocks’ range – neither too hot nor too cold – right now, buoying optimism that the fabled soft landing is within reach where rates are normalised without triggering a recession. The Fed meeting on Wednesday is the highlight of the week, where policymakers are likely to push back against the May cut priced into the money markets. A raft of labour market data accompanies the meeting, with JOLTS expected to ease slightly tomorrow and a strong non-farm payrolls figure on Friday likely to dispel notions of imminent rate cuts.

Markets

The S&P 500 has now gained in 12 of the last 13 weeks, moving up 18% since October as signs of a US soft landing has grown, although it snapped a five-day streak of fresh closing highs on Friday. Asian equities are edging up this morning on optimism that promised stimulus measures from Beijing are finally materialising, dampening the impact of the force liquidation of Evergrande.

Main Economic Events (CET)

3:00pm: Chinese CB Leading Index
11:30pm: Japanese Unemployment Rate

Corporate Events

Earnings calls from Ryanair and Philips

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