January 31, 2024

“All eyes are on the Federal Reserve policy decision this evening, with markets keen to gauge and fine-tune their expectations for when rate cuts kick off this year. Elsewhere, eurozone inflation data is expected to be soft, while the Bank of England is set to be relatively more hawkish tomorrow afternoon.”

Tim Hallinan – Trading Director

Main Headlines

Eurozone governments experienced record demand and sales for bonds directly to investors in January, amounting to €73 billion, as optimism increased for potential interest rate cuts to bolster a weakening economy. This contrasts with concerns earlier in 2023 about elevated government funding needs, particularly in the United States, which led to a bond sell-off and raised borrowing costs to their highest levels in over a decade in October.

In 2023, England and Wales experienced the highest number of company insolvencies since 1993, with 25,158 companies declared insolvent, up from 22,123 in 2022, according to data from the Insolvency Service. British businesses have faced challenges from elevated interest rates, surges in energy bills and staff wages, and subdued demand amid high inflation.

GBP

The Bank of England decision looms tomorrow, with sterling settled in a tight range as markets anticipate heightened volatility over the next few days. Initial losses yesterday sparked by rapid disinflation in BRC retail prices were retraced later in the session. Mortgage approvals shot up to a six-month high in yesterday’s release as financial conditions ease, foreshadowing signals from the Nationwide House Price Index this morning that showed signs of recovery in the housing market – prices rose 0.7% in January, beating expectations for a 0.1% increase. Ultimately, though, traders are unlikely to take strong directionalcues from this data as the BoE meeting comes nearer. Most expect the BoE to hold its line about keeping rates elevated, with rate cuts presumed to come later in the year than for the ECB and the Fed.

EUR

The data deluge continues for the euro this morning after the eurozone narrowly escaped a technical recession in the fourth quarter. The economies of Southern Europe offset the drag from a contracting German economy to bring GDP print for the bloc to 0.0% in Q4 yesterday. In Spain, CPI ticked up from 3.1% to 3.4% in December as the economy expanded by 0.6% in the final three months of the year. In France, however, the inflation figure dropped sharply from 3.7% to 3.1%, and the German print this afternoon should fall to 3.0%. Combined, the data is somewhat supportive of the market’s expectation for a cut in April, although disparate views within the ECB’s Governing Council give an unclear picture of the importance placed on spring wage data that could delay imminent action.

USD

Given a guaranteed policy hold, the dollar’s movements today should be guided by the extent to which the Fed lays the foundations for a cut at its next meeting in its policy decision this evening. With strong consumer confidence and job openings figures reinforcing the US economic exceptionalism narrative, few commentators expect policymaker communications to give the market what it wants, in terms of confirmation that cuts may be imminent. This should temper expectations and further mark down the now 44% probability for March. However, the market has a history of exuberant reactions to any slip ups that hint towards a dovish shift, having puzzled Chair Powell in December when hints of three rate cuts translated into six priced into markets. ADP’s estimate of Friday’s non-farm payrolls and the employment cost index may cause a bit of a reaction this afternoon, but all eyes are on the Fed.

Markets

European and US equity futures have edged lower ahead of the open this morning as traders sit on the sidelines ahead of the Federal Reserve decision this evening. Further capital flight out of China means that Asian shares outside of Japan are set to have fallen 5% in January, while gold is set to notch its first monthly loss in four as rising US yields and a strengthening dollar have increased the opportunity cost associated with holding the non-yielding metal.

Main Economic Events (All Times CET)

1:30am: Australian CPI Inflation
8:00am: German Retail Sales
2:00pm: German Prelim CPI Inflation
2:15pm: US ADP Non-Farm Employment Change
2:30pm: Canadian GDP
8:00pm: Federal Reserve Policy Decision
8:30pm: Federal Reserve Press Conference

Corporate Events

Earnings include Novo Nordisk, MasterCard, Samsung, Boeing, Qualcomm.

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