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Services PMIs in focus as markets reset rate cut expectations

Last week proved to a rather mixed one for global markets with European markets finishing the week modestly higher, but ultimately giving up some of the gains of the previous week on concerns over the prospect that rate cuts might have to wait until later in the year.

US markets on the other hand continued to go from strength to strength with the S&P500 and Nasdaq 100 both closing at new record highs after a blockbuster US payrolls report for January, which quickly saw traders reprice rate cut expectations, as well as sending the US dollar, and yields soaring.

The resilience being seen in equity markets, particularly in the US, is surprising given that central banks are signalling that the prospect of early rate cuts is going to have to wait until later in the year, with the last few days forcing a major rethink on the timing of such a move, especially in the US.

Not only did we see a big surge in January jobs of 353k, but we also saw sizeable revisions to the December numbers which was revised up to 333k from 216k, while adding an average of 27k jobs per month over the second half of 2023. Not only that we saw a bigger than expected rise in average wages to 4.5%, while December was revised higher to 4.3% from 4.1%.

Even if Fed chairman Powell hadn’t poured cold water on the prospect of a March rate cut at this press conference last week, Friday’s payrolls numbers would probably have done that all by themselves. Nonetheless Powell went on to reiterate this message of a careful approach to rate cuts yesterday in an interview with CBS.

Not only that the strength of the revisions, along with the rest of the January data has prompted markets to reconsider the idea of a possible rate cut in May as well, with traders pricing out at least another 2 rate cuts this year and move the market consensus into line with the Fed’s projections of 3 rate cuts for 2024.

The repricing saw the US dollar as well as yields rebound strongly on Friday, and while it is important to remember not to focus too much on one piece of data, there aren’t many signs of significant weakness in some of the recent numbers coming from the US economy.

This more than anything helps to explain why US markets are proving to be more resilient than their European counterparts.

The strength of last week’s numbers also mean that the prospect of a US recession looks further away than ever, and therefore also means that on an economic basis a resilient US economy should mean US company earnings hold up.

This economic resilience also means that US stocks could well be viewed as a more attractive proposition, even accounting for their loftier valuations given that the US economy continues to expand at a healthy rate, with the S&P500 up 3.96% year to date, and the Nasdaq 100 up by 4.85% compared to the DAX which is up by less than 1% and the FTSE100 which is down by -1.5%

We are also starting to signs that manufacturing may have bottomed out given some early signs of a rebound in recent months, albeit from very low levels while most of the strength in the jobs market has been coming from the services sector.

That hasn’t just been true in the US, we’ve also seen modest improvement on manufacturing in Europe albeit from very weak levels, although services sector activity has been slightly patchier, with the recent flash PMI numbers pointing to some significant divergence between economic activity in Europe.

In Europe’s two biggest economies of Germany and France, the service sector has been losing momentum, while in the UK it rose to its highest levels since May last year at 53.8.

In France we saw service sector activity slow to 45 from 45.7, and the lowest since September last year. In Germany we also saw a slowdown to 47.6 from 49.3 in November, increasing the pressure on the ECB to consider bringing forward the timing of its first rate cut.

In Spain and Italy service sector activity, like the UK also appears to be improving with December seeing Spain services activity rise to 51.5, with today’s January numbers expected to come in at 52.1. In Italy the trend also appears to be higher, improving to 49.8 in December and expected to rise to 50.8 today. 

The US is also proving to be more resilient with both services surveys expected to see expansion of 52.9, and 52 for the ISM survey.

EUR/USD – slipped back to support at the 1.0770/80 level last week, with the risk we could slip back towards the 1.0720 area. Resistance still at the 1.0900 area, with a break of 1.0930 needed for a retest of the 1.1000 area. 

GBP/USD – still finding support just above the 1.2590 area. Below 1.2590 targets the 200-day SMA at 1.2540. We need to get above 1.2800 to maintain upside momentum and target the 1.3000 area.

EUR/GBP – continues to find decent support at the 0.8510/20 area these past few days, with selling interest near to the 0.8570/80 area. While below this resistance the risk remains for a move towards 0.8470. Above 0.8580 potentially targets the 0.8620 area.

USD/JPY – finding support just above the 50-day SMA at 145.80, has seen a rebound towards the January highs at 148.80, with a break through here targeting the 150.00 area. Below 145.80 targets the 200-day SMA at 144.30.


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