European markets got off to a soft start to the month yesterday as investors weighed up the messaging from both the Federal Reserve and the Bank of England this week.
Having had a high degree of confidence that rate cuts were coming before the end of Q1, in the first few weeks of this year, this expectation has been reset after both central banks gave markets the equivalent of a bit of a cold shower, prompting some modest weakness across the board, with the S&P500 seeing its biggest one-day loss since September in the aftermath of Powell’s press conference.
We did manage to see a modest rebound yesterday, helped in some part by a decline in oil prices on reports that a ceasefire might be forthcoming between Israel and Hamas in the Middle East, while solid numbers from Amazon and Meta have given a lift to Asia markets meaning a positive start for European markets.
What the past few days has shown us however is that rate cuts are coming, just not as soon as markets were hoping 36 hours ago, although on the plus side all 3 central banks have removed their tightening bias, opening the door to cuts at some point this year.
The dynamics as far as the Bank of England is concerned were probably the most interesting with a 3-way split as 2 MPC members, Mann and Haskel voted for another rate hike, while Swati Dhingra voted for a rate cut. The BOE’s caution appears to be being driven by services inflation, which fell to 6.4% at the end of last year and is expected to be much stickier and is expected to rise to 6.6% in the next few months, before ending this year at 5%.
Events in the Red Sea appear to be influencing policymakers and generating a lot of caution with concerns about an uptick in inflation during the summer months.
Expectations around the inflation and rate cut outlook looked a little bit different this time last week, when markets were keen to assign a high probability that the Fed would look at the possibility of a rate cut in March.
Fed chair Jay Powell’s willingness to pour cold water all over that proved to be a bit of a surprise to a lot of people but it really shouldn’t have given how resilient US economic data has been in recent weeks.
We have seen weekly jobless claims start to edge back up again after dropping below 200k in early January, but even yesterday’s 224k is still a low number and hardly indicative of a struggling US labour market.
There was also yesterday’s better than expected ISM manufacturing survey that rose to its highest level since October 2022, while prices paid jumped to a 9-month high suggesting that input inflation was starting to edge higher again. If this sort of trend is maintained it would help to explain why the Fed is reluctant to move too early when it comes to signalling a modest rate cut.
On the plus side we have seen the tightening bias that all 3 of the ECB, Federal Reserve and Bank of England had at the end of last year come to an end, meaning that the next move on rates is going to be lower.
The debate now will centre around the timing of such a move and more importantly who is likely to move first.
While US bond markets have shifted their thinking from a move in March to a May move, continued resilience in the US economy could complicate matters for the Fed as we head towards the November election.
Nonetheless todays January payrolls report is expected to show a modest slowdown in hiring after the ADP payrolls report slowed to 107k, however wages growth was still at 7.2% indicating continued tightness in the wider labour market.
Today’s January payrolls report is expected to see 185k new jobs added, down from 216k in December while wages are expected to remain unchanged at 4.1%.
The unemployment rate is expected to nudge higher to 3.8%, after last month’s surprise slide to 3.7% although part of the reason for that was a sharp fall in the participation rate to 62.5% from 62.8%, which was a little unexpected. This could well get revised away with an expectation that this could see a tick back higher to 62.6%.
EUR/USD – despite a brief dip to 1.0780 yesterday the broader range between the 1.0800 and 1.0900 remains intact. While below the highs last week at 1.0930 the risk remains for a move towards 1.0720.
GBP/USD – still holding above the main support at the 1.2590 area. We need to get above 1.2800 to maintain upside momentum and target the 1.3000 area.
EUR/GBP – has found support at the 0.8510/20 area these past few days, while selling interest continues 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. Below 145.80 targets the 200-day SMA at 144.30. Resistance remains back at the January highs at 148.80, as well as the highs this week at 148.20.
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