After a wild and turbulent week, which saw European markets close lower for the third week in succession, and US markets hit seven-month lows, before closing the week higher, January has been a month which has proved to be hugely challenging to define a narrative for more than a day.
While markets in Europe ended last week on a downward note, US markets managed to set aside concerns over a much more hawkish Federal Reserve, with the Dow posting its best one day gain this year.
Friday’s rebound in US markets partly stemmed from a record-breaking quarter for Apple, which helped underpin sentiment around a tech sector that has come under increasing scrutiny about the sustainability of some valuations.
The late rebound also saw US markets finish the week higher, in a move that is likely to aid in getting European markets off to a positive start this morning, as we come to the end of what has been a turbulent month.
Last week’s Fed meeting only added to the overall uncertainty for investors by giving the impression that they could well raise rates at every meeting, and even consider a 50bps hike if the need arose.
This was a point that was emphasised further at the weekend by Atlanta Fed President Raphael Bostic, and while it adds to the noise about a 50bps rate hike in March, it doesn’t mean that it is any way likely. This is because Bostic has always tended to lean towards the more hawkish side on monetary policy. He was one of the first members to break ranks to urge faster tapering. There is also the fact he doesn’t have a vote this year.
What has been more notable is that the more dovish voices on the FOMC have become much less so, with Minneapolis Fed President Neel Kashkari also saying rate rises were needed, which means that a March move seems pretty much nailed on, as markets price in the prospect of up to 5 rate rises this year.
If markets were looking for reassurance from the Federal Reserve last week about the pace of policy tightening, they didn’t get it, with Powell insisting that all Fed policy options were open for March and beyond. While this seems entirely sensible; it wasn’t the message increasingly nervous markets wanted to hear. In essence it was the Fed saying to markets that the days of handholding are over; and that their priority now is inflation, and not the jobs market, as we look towards Friday’s jobs report, where the focus has been less on the headline jobs number in recent months, and more on the wages numbers.
This week market attention shifts to the likes of the Bank of England, as well as the European Central Bank on Thursday, for their rate decisions, though we also have the Reserve Bank of Australia tomorrow, although no change is expected there. Today’s Germany CPI numbers are likely to give the ECB cover later this week to maintain their loose policy narrative for the remainder of this year, when it slips back from 5.3% to 4.4% in January, largely due to the reintroduction of regular VAT rates and additional climate measures which boosted German CPI by over 2% a year ago, thus introducing a higher base line for today’s figure.
Over the last two weeks, the People’s Bank of China has been going in the opposite direction on monetary policy, easing several key loan rates in order to reinvigorate an economy that is struggling with higher inflation, disrupted supply chains, and a government determined to pursue its zero-covid policy.
The latest manufacturing and services PMIs for January which were released yesterday served to reinforce this weakness, with manufacturing PMI slipping to 50.1, while the equivalent Caixin survey slipped to 49.1, its lowest reading since March 2020. There was also more subdued activity in the non-manufacturing survey as it fell to 51.1 and its lowest level since February 2020.
On the data front the first iteration of EU Q4 GDP is expected to show the economy expanded 0.4%, down from 2.2% in Q3, with the German economy acting as the biggest drag after last weeks bigger than expected -0.7% contraction.
The Italian economy is expected to slow to 0.5% in Q4, from 2.6%.
EUR/USD – last week’s break below the November lows as well as the June 2020 lows, keeps the pressure on for a move to the 1.1000 area, on the way to 1.0800. Pullbacks are now likely to find resistance at the 1.1270 area.
GBP/USD – slid below the 50-day MA and 1.3430 area, at the end of last week, an area which is now likely to act as resistance. While below this area the risk is for a move towards the December lows at 1.3160. Above 1.3450 argues for a move towards 1.3520.
EUR/GBP – retested the 0.8305 lows last week, and on course for a move towards the 0.8280 area, and potentially lower. Resistance remains at the highs at the 0.8420 area.
USD/JPY – looks on course to retest the recent highs at 116.25, while above the 114.70 area. We also have support down near the recent lows at 113.80.