Cautious Open for Europe in A Big Week for Earnings and Central Banks

Economic

Forex

Summary:

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...

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.

To stay updated on all economic events of today, please check out our Economic calendar

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Remarks of Officials

The European Central Bank (ECB) published the Survey of Professional Forecasters (SPF) for the first quarter of 2024 on Jan. 26, and the main points of the report are as follows:

Inflation

HICPI: Revised downward to 2.4% in 2024 (2.7% previously), revised to 2.0% in 2025 (2.1% previously), and was expected to be 2.0% in 2026 (no survey in the last round).

Core HICP: Revised downward to 2.6% in 2024 (2.9% previously), revised to 2.1% in 2025 (2.2% previously), and was expected to be 2.0% in 2026 (no survey in the last round).

The downward revisions reflect the impact of the HICP data results and lower-than-previously-expected oil prices, as well as weaker economic activity.

Economy

GDP growth is revised down to 0.6% in 2024 (previously 0.9%), 1.3% in 2025 (previously 1.5%), and 1.4% in 2026.

A key factor in the pickup in economic activity in 2024 is the boost from rising real incomes as inflation falls further.

The economic outlook is more cautious, largely due to geopolitical tensions, particularly in the Middle East, and their impact on business and consumer confidence. At the same time, higher wage growth and lower headline inflation are still expected to boost real household incomes and support household spending.

Unemployment Rate

Unchanged from 2024 and 2025 expectations (6.7%, 6.6%), and expected to be 6.5% in 2026.

The labor market has remained surprisingly resilient relative to actual economic conditions and the economic cycle. Nonetheless, respondents still expect the unemployment rate to rise in 2024, given weak economic activity and rising labor costs. Over the longer term, the unemployment rate is expected to decline, primarily due to an expected pickup in economic activity, but also due to demographic factors.

Uncertainty about short- and long-term unemployment expectations remains at relatively high levels. Overall uncertainty has been fluctuating up and down from higher levels (above pre-pandemic levels) in recent survey rounds. On the risk side, respondents noted that the unemployment outlook faces mainly upside risks in the context of a weaker economic growth outlook and higher-than-previously-expected increases in labor costs in 2024 and 2025.

Wage Growth

Wage growth is projected to increase by 4.2% in 2024 and 3.4% in 2025 before slowing to 2.8% in 2026 and 2.6% over the longer term.

Interest Rates

The ECB's benchmark interest rate (the main refinancing rate) is expected to remain at 4.5% in the first quarter of 2024. From the second quarter, it will slow down and reach 3.75% in the fourth quarter of 2024, and drop further to 3.0% in 2025, rising by 2.75% in 2026.

Survey of Professional Forecasters

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Zi Cheng

Traders' Opinions

Forex

Fundamental Analysis

Having recouped the majority of losses incurred during the Asian session, S&P500 futures indicate a notable resurgence in investor risk appetite. The US Dollar Index, or DXY, has retreated to around 103.38, falling short of reclaiming the monthly high of 103.82. Concurrently, 10-year US Treasury yields have dipped to approximately 4.11%.

Despite the expectation of a delay in the Federal Reserve interest rate reduction, with May being targeted instead of March due to the resilient US economy, market sentiment is on the upswing. The robust 3.3% growth of the US economy in the final quarter of 2023 bodes well for prospects in 2024, providing Fed policymakers room to avoid hastily initiating a 'rate-cut' campaign.

Investors are eagerly awaiting updated guidance on the interest rate outlook, with focus on the forthcoming US core PCE price index data. Projections suggest a 0.2% monthly increase, compared to a marginal 0.1% uptick in November. The annual inflation gauge has moderated its pace, registering a 3% growth versus the previous rate of 3.2%.

Turning to the Australian Dollar, attention is directed towards the Q4 Consumer Price Index, or CPI, data set to be released next week. Expectations point to a significant softening of price pressures to 4.3%, down from the 5.4% recorded in the July-September quarter, potentially providing relief to Reserve Bank of Australia policymakers.

AUD/USD Consolidates At 0.66000 Key Level Awaits US Data_1

Technical Analysis

AUD/USD has been consolidating around the 0.66000 key level for the past week as we can see from the chart attached. It has formed a small support and resistance at the key level, whenever situations similar to this happen, the market is waiting for some news that act as a catalyst to either break out towards the upside or downside.

Besides that, price is also very close to the 200 Day Moving Average, when this happens, it shows that there is no strong buyer or strong seller involved currently, that is why price stays around the 200 Day Moving Average. I only will take the decision to buy or sell once the price moves away from the 200 Day Moving Average indicating there could be a huge trending move coming up.

Currently, the likelihood of a rate cut by the Federal Reserve in 2024 is under consideration. However, there is uncertainty regarding whether other banks will follow suit, given the potential for a slowdown in global trade. The prevailing confusion in the current situation necessitates careful monitoring of this pair, as it may provide insights into the direction of risk appetite.

AUD/USD Consolidates At 0.66000 Key Level Awaits US Data_2

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Thomas

Economic

China's deflation pressures are likely to continue for at least another six months on weak demand and as the property crisis continues to sap confidence within the economy.

A measure of economy-wide prices called the gross domestic product (GDP) deflator is expected to decline for at least two more quarters, according to 12 of 19 economists in a new Bloomberg survey. That gauge — which measures the difference between nominal and real GDP growth — has already fallen for the last three quarters, and a continued drop through June would mark the longest streak since 1999.

"The culprit is the property downturn," said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. He projected another two quarters of declines in the gauge. "Households lack confidence in real estate. They are not sure whether property is wealth-preserving. They need an assurance by the authorities."

Entrenched deflation and declining house prices are two of the most serious problems faced by the world's second-largest economy this year as it tries to regain and sustain momentum. While China was able to reach an official growth goal of "around 5%" in 2023, repeating a similar performance may be difficult. China's Deflation Pressures Seen Persisting Through Mid-2024_1

China's Deflation Pressures Seen Persisting Through Mid-2024_1

Economists in a separate Bloomberg survey upgraded their growth forecasts slightly for the next couple of years. GDP in 2024 is now seen expanding 4.6% from the prior year, according to a poll of 66 economists, up slightly from an earlier projection of 4.5%. The median estimate among 51 economists for growth in 2025 was raised to 4.5% from 4.3%.

Still, those figures track below the 5% growth rate that several economists — including some linked to the government — have speculated Beijing may target this year.

Consumer prices are seen remaining depressed to start the year, with economists projecting the consumer price index (CPI) rising 0.2% this quarter before gradually speeding up. The median estimate for annual CPI was 1.1%, slightly lower than the 1.4% gain in the last survey.

"A key risk to watch out for is that of deflationary expectations setting in among households and businesses," said Erica Tay, economist at Maybank Securities. "At this juncture, the urgency of fiscal support has intensified."

All but one of 17 economists surveyed forecast home prices will continue dropping month-on-month until the third quarter of this year. The price of newly built homes has fallen every month since April 2022. Second-hand home prices have declined for even longer.

"It's hard to see a quick turnaround soon," said Allan von Mehren, chief China economist at Danske Bank A/S. "More aggressive monetary stimulus and further easing of housing policies should lead to stabilization in prices in the second half of 2024."

Other key highlights from the survey:

Economists still see the People's Bank of China (PBOC) cutting the rate on its medium-term lending facility by 10 basis points in the first quarter. They also now expect the PBOC to trim that rate again in the third quarter

Both the one- and five-year loan prime rates are seen being lowered by 10 basis points in the January-to-March period

Exports are likely to drop 2% in the first quarter, worse than an earlier expectation for a 1.4% decline. Overseas shipments are then seen returning to growth from the second quarter

Imports are expected to rise 1% in the first quarter, weaker than an earlier estimate of a 1.6% increase

Source: Bloomberg

To stay updated on all economic events of today, please check out our Economic calendar

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Economic

Investors hope a mix of robust US economic data, cost-cutting, and AI optimism will mean upbeat results from these tech titans.

Exciting economic week ahead

In the upcoming week starting 29 January, there are some important things happening that could affect the global economy. This will include finding out how the economy is doing in France and the eurozone, how people are feeling about the economy in Europe, and how many jobs are available and how confident consumers are in the US. We'll also see how things are going in China, Australia, and Germany. On top of that, there will be reports about how many private jobs were added in the US, how much crude oil is stored, and whether or not they're changing the interest rate. The eurozone will also share information about how much things cost, and the Bank of England will let us know if they're changing their interest rate.

More company earnings reports expected

There will also be lots of companies sharing how they're doing financially. Some famous ones include Philips, Ryanair, Diageo, Pfizer, General Motors, Advanced Micro Devices, Microsoft, Alphabet, UPS, H&M, GSK, Novartis, Boeing, Qualcomm, Shell, BT, Deutsche Bank, Apple, Peloton, Meta Platforms, Amazon, Chevron, and ExxonMobil. These reports will give us a better idea about how these companies are doing and could affect how people feel about the stock market.

Stock market doing week

Right now, the stock market is doing pretty well and keeps reaching new record highs. Even though Intel and Tesla didn't do as well as expected, it hasn't really changed how people feel about the overall market. It seems like how each individual company is doing isn't really affecting the whole market very much, and people are feeling cautiously optimistic.

Looking ahead to the earnings reports, Amazon is expected to have good news because their stock has done well and people keep buying it even if the price goes down. But they'll need to give us good news about the future to keep everyone happy.

All in all, it's going to be an interesting week with lots of important news that could change how people feel about the economy and the stock market.

To stay updated on all economic events of today, please check out our Economic calendar

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Daily News

[Quick Facts]

1. Oil jumps up over 1% as Houthi attacks on oil tankers raise supply concerns.

2. U.S. data may boost market expectations for rate cuts.

3. Timiraos: The Fed may no longer signal in the policy statement that rates are more likely to rise than fall.

4. Brainard: Strong job growth is a reason for optimism for U.S. economy.

5. U.S. pending home sales rise by most in over 3 years.

[News Details]

Oil jumps up over 1% as Houthi attacks on oil tankers raise supply concerns

Crude oil opened up more than 1% on Monday. The price of WTI hit $79.23 per barrel, a new high in nearly two months, as the market was worried about fuel supplies after a tanker vessel operated for Trafigura was struck by a missile in the Red Sea. Russia's refined oil products exports also fell because several refineries were being repaired after being struck by drones.

There have been supply disruptions due to the Red Sea incident. But the situation changed last Friday after a tanker vessel operated for Trafigura was hit by a missile off the coast of Yemen. With oil tankers linked to the U.S. and UK now under threat of attack, the market is likely to reprice the risk of disruptions.

U.S. data may boost market expectations for rate cuts

U.S. December PCE published last Friday rose by 2.9% year-on-year, unchanged from the expected and previous readings, and it increased by 0.2% month-on-month, higher than the previous -0.1% but in line with expectations. Core PEC rose by 2.9% y/y, lower than the previous 3.2% and the expected 3%; it increased by 0.2% m/m, higher than the previous 0.1% but also in line with expectations.

The real personal consumption expenditures climbed by 0.5%, rising for the second consecutive month. Real disposable income, the main supporter of consumer spending, rose by 0.1%, the smallest in three months.

Nick Timiraos, a reporter for The Wall Street Journal, tweeted that this was the sixth time in the past seven months that the month-on-month growth rate of the core PCE price index has been below or flat to the Federal Reserve's target of 2%. He added that over the last six months, the core PCE price index rose 1.9% at an annualized rate, and it increased by only 1.5% over the last three months, both below the Fed's target.

While inflation continues to slow, the U.S. economy is growing at a solid pace. Data released last week showed that U.S. real GDP grew by 3.3% in the fourth quarter. The soft landing that the market was looking for seems to be coming quickly.

The market had previously expected a more moderate rate-cutting course by the Fed due to concerns about the stickiness of inflation. Now that the slowdown in inflation has been confirmed by data, the market will price in quicker and more significant rate cuts.

Timiraos: The Fed may no longer signal in the policy statement that rates are more likely to rise than fall

The Wall Street Journal reporter Nick Timiraos wrote that the Fed will not cut rates at this week's policy meeting because the economy has been growing solidly. Although monthly inflation excluding food and energy has been at or below 2% for six of the past seven months, the Fed wants to make sure that this is sustained before cutting rates.

Fed officials are likely to take a symbolically important step this week by no longer signaling in their policy statement that rates are more likely to rise than fall.

Typically, the Fed cuts rates because of a sharp slowdown in economic activity, but growth remained surprisingly strong until late last year. Rather, they are mulling whether softening inflation means real interest rates will be unnecessarily restrictive if they don't act.

Brainard: Strong job growth is a reason for optimism for U.S. economy

The White House expects consumer confidence will continue to improve, and strong employment will boost U.S. economic growth, said Lael Brainard, director of the National Economic Council and former Federal Reserve Vice Chair. In the face of a series of strong economic data, Brainard said she thinks the American economy looks upbeat no matter which way you look at it. She said core inflation was below 2% on both a 3-month and 6-month basis. She believes the supply-side problems that pushed up prices have been behind us and the worst phase of inflation is over. Brainard said strong job growth and earnings are reasons for optimism for a continued recovery. She says that the continued good employment picture means that consumers can continue to power this economy.

U.S. pending home sales rise by most in over 3 years

The index for U.S. pending home sales in December, released last Friday, posted its biggest increase since June 2020, suggesting that stabilizing mortgage rates may be attracting potential home buyers. The National Association of Realtors (NAR) Pending Home Sales Index increased by 8.3% from last month to 77.3, far higher than the expected 1.5%.

The U.S. housing market saw a good start this year as consumers benefited from falling mortgage rates and stabilizing home prices. Job additions and income growth will further help with housing affordability.

The index fell to an all-time low last year. Mortgage rates approached 8% last October, hitting a 20-year high, but they fell back after the Federal Reserve left interest rates unchanged since July. Mortgage rates rose to 6.69% for the week of Jan. 25 but remained steady in the 6% range, Freddie Mac data showed.

[Focus of the Day]

UTC+8 15:35 ECB Vice President Guindos Speaks

UTC+8 04:00 Next Day: Reserve Bank of New Zealand's Chief Economist Speaks on Policy Challenges and Recent Data

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Samantha Luan

Economic

Central Bank

The big questions for investors in Asia this week are whether the rebound in sentiment towards China is sustained, and whether the Federal Reserve vindicates or cools the growing belief in markets that it will soon start cutting U.S. interest rates.

The Fed decision and Chair Jerome Powell's press conference on Thursday will dominate proceedings, and the biggest market-moving event in Asia is potentially the release of Chinese purchasing managers index data.

The regional calendar also includes PMIs from across the continent, fourth-quarter GDP figures from Taiwan, Hong Kong and the Philippines, and the latest inflation figures from Indonesia and South Korea.

Asian markets go into the week with their tails up. Bumper U.S. GDP data combined with surprisingly low inflation last week provided further evidence that the world's largest economy is steering clear of recession and headed for a soft landing.

This fueled a bullish burst of 'risk on' sentiment globally, while the positive reaction to China's efforts to support its markets and economy added further local cheer.

Beijing's latest move came on Sunday, with the securities regulator saying it will fully suspend the lending of restricted shares effective from Monday. Figures on Saturday, meanwhile, showed that industrial profits in China are shrinking at their slowest rate since October 2022.

China's CSI 300 index of leading shares snapped a three-week losing streak and rose 2%, the Shanghai Composite jumped 2.75% for its best week since July, and the MSCI Asia ex-Japan index also snapped a three-week losing streak.

Japan's Nikkei 225 bucked the trend and ended lower - its biggest fall in seven weeks - but not before clocking a new 34-year high just shy of 37,000 points. It would not be a total surprise if profit-taking and position-squaring extended into this week.

On the data front, China's PMIs top the bill, providing the first glimpse into how Asia's largest economy has started the year.

The official manufacturing PMI is expected to remain in contractionary territory for a fourth month, according to a Reuters poll, although edging up to 49.3 from 49.0 in December.

Manufacturing activity has been shrinking for most of the past year, underscoring the wider economy's lackluster recovery from the pandemic and doubts over its trajectory.

U.S. Treasury Secretary Janet Yellen said on Friday she doesn't expect major spillovers from China's economic travails. Beijing has taken steps to inject liquidity into the financial system and shore up the property sector, and markets have responded favorably, at least initially.

There are no policy decisions in Asia this week, although the Bank of Japan on Wednesday sheds lighter on its thinking when it releases the summary of board members' opinions from its Jan. 22-23 policy meeting.

Here are key developments that could provide more direction to markets on Monday:

- New Zealand trade (December)

- Singapore business expectations index (Q4)

- Euro zone flash GDP estimate (Q4)

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

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Cautious Open for Europe in A Big Week for Earnings and Central Banks