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Cautious open for Europe in a big week for earnings and central banks

European markets saw an end of week surge in the wake of Thursday’s ECB rate meeting, as the messaging from Christine Lagarde’s press conference continued to get absorbed, along with further attempts by China to stimulate its slowing economy with further interest cuts. 

Although we heard some pushback from other ECB policymakers on the idea that we might see an early rate cut in April, it almost came across as a little bit half-hearted given the dire nature of a lot of the economic numbers coming out from Germany and France.

The big rebound we saw on Friday helped the DAX and CAC 40 both set record daily closes, as well as come within touching distance of their previous record highs set back in December.

US markets went one better setting new record highs on the S&P500, Nasdaq 100 and the Dow although, unlike markets in Europe, they did struggle a little on Friday, with both the S&P500 and Nasdaq 100 closing lower on the day, as we look head to a big week for US tech stocks, as well as markets here in Europe.

We also have the small matter of the latest Federal Reserve rate decision with more and more high-profile bank names trying to set the scene for a March rate cut from the US central bank.

Looking at the continuing resilience of last week’s US economic data this seems a big ask and while no-one is suggesting that we won’t see a rate cut this year, March comes across as way too soon even if there is a US election in November this year.

There is the argument that the US central bank will want to avoid the optics of cutting rates so close to an important vote decision, lest they be accused of acting politically. The problem with that argument however is that in acting too early they could also be accused of acting politically, rather than basing any decision on the data alone.

At any other time and based on the economic data alone it’s hard to envisage a reason as to why the Fed would deem it necessary to consider a rate cut at this point, or in the next few weeks, especially if we get yet another strong jobs report on Friday.

Last week saw Q4 GDP come in at 3.3%, well above forecasts of 2%, while continuing jobless claims nudged higher from 10-month lows. Personal spending also came in higher than expected in December, while November was revised upwards, pointing to a resilient US consumer and economy.

This data resilience has prompted some doubts to creep in with respect to the potential for a March rate cut in the last few days with bond markets losing ground, sending yields edging back up again.

For now, the market appears to think that the US economy is heading for a soft landing with earnings numbers coming in slightly better than expected, thus removing the need for aggressive rate cuts in the coming months.

With the S&P500 up 2.5% already this month, and the Nasdaq 100 up by 3.5% the bar to this week’s numbers from the likes of Microsoft, Apple, Amazon, Meta and Alphabet is already set quite high, and that’s even before what Powell might have to say on Wednesday evening.

At any rate given the strong finish seen at the end of last week, markets in Europe look set to open the new week in a reasonably cautious fashion, with the fun set to begin tomorrow as the ECB gets first sight of the latest Q1 GDP numbers from Germany, France, Italy, Spain, and the EU, with the flash January CPI data later in the week.

At the end of this week the ECB could find itself in the position whereby it is trying to justify not cutting rates at a time when the bloc is in a technical recession, increasing the pressure for an earlier rate cut as soon as April.


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