German Consumers Experience the Impact of Persistent Inflation

Economic

Forex

Summary:

Consumer confidence in Germany is expected to decline in February, with individuals opting to save rather than spend in the current challenging economic conditions. The wintry economic landscape is influencing shoppers' behavior, leading to a subdued outlook.

Consumer confidence in Germany appears poised for a significant decline in February, as economic headwinds and concerns over persistently high inflation weigh heavily on shoppers' minds. The forward-looking consumer-sentiment index, jointly compiled by research group GfK and the Nuremberg Institute for Market Decisions, paints a grim picture, forecasting a sharp plunge from minus 25.4 to minus 29.7. This projection starkly contrasts economists' expectations, who had anticipated a more modest decline to minus 24.5, according to a Wall Street Journal poll.

One of the key factors contributing to the hesitancy among German consumers is the gloomier outlook for personal incomes and the general economy, as revealed by the survey. Despite a temporary improvement in consumer sentiment noted last month, characterized as a brief flare-up before Christmas, the start of the year has seen a severe setback, indicating a prevailing cautiousness among consumers. Rolf Buerkl, a consumer expert at NIM, remarks, “The consumer climate suffered a severe setback at the beginning of the year.”

The overarching concern among German shoppers remains inflation, far outpacing other worries such as political and economic uncertainty. The survey underscores the extent to which rising prices are influencing consumer behavior and contributing to a conservative approach towards spending. The inclination to save rather than spend reflects the broader economic landscape, which is marked by uncertainties and challenges.

Moreover, the report provides a sobering outlook for the German economy at the onset of the year. Business outlooks have worsened, as indicated by recent purchasing managers' data. Sentiments in the private sector are equally pessimistic, with firms expressing heightened worries about their prospects in the coming months. These results collectively dampen hopes for a swift recovery in consumer sentiment, pushing expectations further into the future.

The GfK/NIM report emphasizes that ongoing crises, geopolitical tensions, and persistent high inflation are fostering a sense of insecurity among consumers. This insecurity, in turn, hampers any potential improvement in consumer sentiment. The findings highlight the interconnected nature of economic variables, where external factors contribute significantly to shaping consumer behavior and economic sentiment.

Germany faces a complex economic scenario characterized by a sharp decline in consumer confidence, reluctance to spend, and pervasive concerns about inflation. The impact on businesses and the private sector further compounds the economic challenges, setting the tone for a cautious and uncertain start to the year for the German economy. The intricate interplay of economic factors underscores the need for comprehensive strategies to address the multifaceted challenges facing Germany in the current economic landscape.

Source: Wall Street Journal

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Swissquote

Economic

Forex

The EURUSD traded south yesterday, as the European Central Bank (ECB) Chief Christine Lagarde reckoned that growth and inflation are slowing, while insisting that the rate cut decision will be data dependent. The pair cleared the 200-DMA support, fell to 1.0820, it’s a little higher this morning, but we are now below the 200-DMA and the ECB rate cut bets on falling inflation and slowing European economies remain the major driver of the euro weakness, with many investors now thinking that June could be a good time to start cutting the rates. Three more rates could follow this year.

Across the Atlantic, the US released its latest GDP update and the data was as good as it could possibly get. The US economy grew 3.3% in Q4 versus 2% expected by analysts. It grew 2.5% for all of last year –quite FAR from a recession. The consumer spending growth slowed to 2.8%, but remained strong on healthy jobs market and wages growth, business investment and housing were supportive and… the cherry on top: the GDP price index, a gauge of inflation fell to 1.5%. Plus, data from rent.com showed that the median rent rate declined in December, and that’s good news when considering that rents have been one of the major drivers of inflation lately, and they look like they are cooling down. In summary, yesterday’s US GDP data was the definition of goldilocks in numbers: good growth, slowing inflation. A dream comes true.

As reaction, the US 2-year yield fell below 4.30% and the 10-year yield fell below 4.10%. The strong numbers didn’t necessarily hammer the Federal Reserve (Fed) cut expectations given that inflation slowed! Investors are not sure that March would bring the first rate cut from the Fed – as the probability of a March cut is around 50%, but a May cut is almost fully priced in. Today, all eyes are on the Fed’s favorite gauge of inflation: core PCE – expected to have retreated to 3% in December. A number in line with expectations, or ideally softer than expected could further boost risk appetite.

What could go wrong?

Energy prices could go wrong.

Oil bulls finally got the positive breakout that they were looking for in oil prices. The barrel of American crude cleared the $75pb resistance and extended gains past $77pb on muddy geopolitical picture in the Middle East and on the back of a 9-mio barrel slump in US weekly oil inventories. The American crude tested the 200-DMA, near $77.50pb, to the upside but has so far been unable to take it out.

Moving forward: Positive momentum is building, the ample supply story has been broadly priced in and if Mid East tensions take over the market narrative, there is no reason to keep the oil bulls contained. The next natural target is the 200-DMA. If broken, oil bulls will challenge the $78.60, the major 38.2% Fibonacci retracement on September to December selloff and a breakout above this level will point at a medium term bullish reversal, and could pave the way for a further rise to the $80pb.

Article Source： ACTIONFOREX

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Danske Bank

Central Bank

Economic

The title of this preview quotes SF Fed’s Mary Daly, a new FOMC voter for 2024, who was the last participant to comment on monetary policy outlook ahead of the January blackout. Next Wednesday, with no new economic forecasts, all eyes will be on Powell, who we expect to echo Daly and several of their colleagues’ recent remarks, emphasizing cautious yet optimistic outlook.

Market prices in around 140bp of cuts for this year. Over the past 40 years, the front-end of the curve has only been as inverted just ahead of recessions, which does not seem like the case today. Recovering real wages, easier financial conditions, rising consumer optimism and supportive fiscal policy all suggest that an imminent slowdown is unlikely.

The December projections showed that real policy rate would remain somewhat above 2% this year, around 1.5% in 2025 and then settle close to neutral in 2026. While the Fed is happy to discuss rate cuts for 2024, monetary policy will not be expansionary anytime soon.

The December minutes suggested that upside risks to inflation have ‘diminished’, but some risk of persistent inflation still remains, especially in housing and non-housing services. With the recent strong data signals from labour markets, consumer demand and housing market, we think that the near-term inflation outlook supports the gradual approach.

In addition to Daly, also Mester, Barkin and Bostic are rotating in as the new FOMC voters for 2024, while Goolsbee, Harker, Kashkari and Logan are moving out. We do not expect the rotation to have a significant impact on the Fed’s decision making, but if anything, the new voters’ recent comments have been on the hawkish side of the spectrum. Mester explicitly noted that March is too early for a rate cut in her view, while Bostic outlined Q3 as his base case for the first cut. Barkin has not specified a timeline for cuts but noted that progress on inflation has remained narrow and focused on goods.

The outlook for tapering QT has also been increasingly brought up in the latest Fed speak. Waller noted that the endpoint level of reserves could as low as 10-11% of GDP, and that the ON RRP could well be drained to zero. We looked at the arithmetics of QT in our recent edition of Reading-the-Markets USD (16 January), but the key takeaway is that liquidity conditions will likely allow the Fed to continue QT at least until the end of 2024. Overall, we think Powell could guide modestly against the notion of rapid rate cuts and/or end of QT, which leaves risks tilted towards a hawkish market reaction. That said, the upside potential to yields is likely limited, as we still expect a total of four cuts in 2024.

Sources:Fxstreet

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FastBull Featured

In the world of finance, every number carries a story. From the perspective of numbers, we are digging deeper into the remarkable financial events during the past year.

1. Early January - FTX's Collapse

Although occurring at the end of 2022, this event was a huge blow to the industry. The wealth myth of $32 billion created in three years went to zero in less than ten days. Under the market panic triggered by the FTX's collapse, cryptocurrency platforms such as Binance, HTX, and OKX, immediately announced their capital reserves to prove those platforms' security. It promoted a series of related events, such as escalating regulatory pressure in the United States.

In the two days following FTX's liquidity crisis on November 8, bitcoin plunged wildly from $20,000 to $15,000, hitting a new low since November 2020. It was not until mid-January of the following year that it gradually regained its "vigor" and climbed from $16,000 to $23,000.

2. March - Silicon Valley Bank Event

On March 10, 2023, Silicon Valley Bank, with $209 billion in assets, announced bankruptcy after a bank run, becoming the second-largest bank failure in U.S. history. We can conclude the event in a sentence: The Bank invested by using others' deposits but suffered losses, so it had no money to repay the debts that depositors pressed for payment.

After Silicon Valley Bank failed, U.S. stocks felt the "chill" soon. The U.S. banking stocks all dived on the same day. Prices of shares in JP Morgan Chase, Bank of America, Wells Fargo and Citigroup plummeted, and about $50 billion was wiped off the total market value. On 11, the NASDAQ index fell by nearly 200 points, or 1.76%; Dow Jones dropped below the 32,000 mark, marking a decline of 1.07%.

This event caused huge turmoil in the banking industry in the United States and even the world. The U.K. Treasury said that it would place Silicon Valley Bank's U.K. subsidiary into insolvency procedure. The U.K. government was looking at financing solutions to help the Bank's hundreds of customers in the U.K. meet their cash flow obligations. The Bank of Korea said it was closely monitoring any impact on interest rates, stock prices, exchange rates, and capital flows.

The whole financial market was in panic. The market once expected that the potential systemic risks in the banking sector would make the Federal Reserve temporarily choose to ease rather than tighten financial conditions. Against this background, the U.S. dollar index fell from 105.3 to 102.2 in March.

3. May - U.S. Debt Default Storm

Over the years, successive fiscal deficits have resulted in higher U.S. debt. The debt ceiling issue has gradually become the norm.

In late May, the two parties reached an impasse on the debt ceiling. It came less than two weeks before the U.S. defaulted on its debt on "X-Day" (June 1). The political game between the two parties was intensifying at the same time. The market finally fell into a panic, and the financial market saw turmoil, especially the bond market. On May 24, the yield on U.S. Treasury security due June 1 exceeded 7.1%; the yield on 10-year Treasury security once rose to 3.738%; Bitcoin fell by 2.84%, breaking its rising streak. U.S. stocks were less affected by the debt ceiling crisis, with only the Dow Jones Industrial Average index correcting near "X-Day". The U.S. Dollar Index, similar to 2011, pulled back near "X-Day", but it rallied after the suspension of the debt ceiling.

Looking back, the United States has raised the debt ceiling 104 times, but in the different fiscal and monetary environments, each debt crisis developed in a different path and to a different degree.

Historical patterns show when Democrats are in power and there is a divided government, the resolution of the debt ceiling crisis tends to be bumpy.

The fundamental reason is that the Democratic Party prefers the political idea of "big government and small market", so larger financial resources are needed to support the realization of the policy idea, especially under a divided government. The Republican Party tends to increase the debt ceiling in exchange for cutting financial expenditures. The two parties will be even more divided.

In a stalemate, a bill may be passed near "X-Day", which may result in a government shutdown and a technical debt default, bringing a large impact on the capital markets. For example, in 2011 when a bipartisan agreement was reached only a few hours before "X-Day." Although the U.S. government did not actually default, the approach of the fiscal cliff caused great panic in the market. S&P then downgraded the U.S. rating for the first time.

4. June - The Fed's 1st "Pause in Rate Hikes"

On June 14, ET, the Federal Reserve pressed the "pause button" in this meeting, and passed the decision unanimously. This was the first time the Fed paused after 10 consecutive interest rate hikes. The change in the dot plot in the SEP stunned the world as the median interest rate at the year-end of 2023 was raised to 5.625%, far higher than the 5.1% shown in that last dot plot. The meeting signaled that the world's major central banks would enter the end of the rate hike cycle. U.S. stocks immediately jumped a point after the rate decision was announced. The losses narrowed by the close, with the Nasdaq and S&P 500 closing higher. The U.S. dollar index plunged by 0.83%, marking the largest one-day decline in 1 month.

5. July - Bank of Japan's Intervention in Forex

The Bank of Japan announced in its policy meeting to adjust the yield curve control (YCC) policy during the Asian trading session on July 28. The bank said it would be flexible to control the 10-year yield, also known as "foreign exchange intervention". After the meeting, the yen exchange rate rose sharply by more than 300 points, or 1.25%. The 10-year yield on Japanese bonds rose to 0.501%, breaking above the 0.5% ceiling. The Nikkei 225 index fell by 0.99%, staging a "stock and bond double kill". The main stock markets in Asia-Pacific region also declined across the board. It is worth mentioning that there was news the day before that the Bank of Japan would carry out foreign exchange intervention, which also triggered the market fluctuations in advance. This was the Bank of Japan's first intervention in 2023, followed by many verbal or action interventions for the rest of the year.

The last intervention was in September 2022 when the Bank of Japan decided to maintain its ultra-loose monetary policy, resulting in the yen falling to 145 per dollar. To boost the yen, the Bank of Japan bought it heavily, which was the first intervention since 1998. The bank intervened again in October 2022 after the yen plunged to a 32-year low of 151.94.

Yen-buying intervention is rare. Far more often, the Japanese Ministry of Finance has sold yen to prevent its rise from hurting the export-reliant economy by making Japanese goods less competitive overseas. However, the weak yen was the problem at the time, as a large number of Japanese companies had shifted production overseas and the Japanese economy was heavily dependent on imports of commodities such as fuel, raw materials and machinery parts.

6. August -Fitch Downgrades U.S. Credit Rating

Fitch announced on August 1, ET, that it had downgraded the U.S. credit rating to AA+ from AAA, with a stable outlook. The last time the U.S. credit rating was downgraded happened in 2011. The S&P plunged by 6.66% on the same day, and Asian stock markets saw a sell-off. The Nikkei index slumped by 500 points, and South Korean stocks plummeted by more than 1%. The next day, three major U.S. stock indexes all fell, with the Dow down 1%, the S&P dropping 1.4%, and the Nasdaq declining 2.2%. The 10-year Treasury yield rose to 4.077%, the highest level since November 2022. The event had a greater psychological rather than substantive impact on the market in the near term. The expectations of "trading a recession" rose sharply.

7. October - Israeli-Palestinian Conflict

On October 7, an armed conflict broke out between Hamas-led Palestinian armed groups and the Israeli army, which officially kicked off the Palestinian-Israeli conflict. The incident occurred as global markets were closed. After the opening of the market on Monday, risk aversion sentiment increased quickly, and Israel's financial markets were in a full risk-aversion mode. The Israeli currency shekel fell to 3.92 against the dollar, the lowest level since 2016. On October 9, volatility increased on the Tel Aviv Stock Exchange (TASE), and the Israeli stock market index fell 7% on Monday. It was a record one-day drop.

The government bond yield curve was beginning to steepen: Yields at the short-end fell sharply as safe-haven funds flooded into Israeli government bonds, while long-end yields rose, signaling a rise in inflation expectations due to war spending.

Stock markets across Europe opened lower on Monday (October 9) and stabilized slightly after traders accepted the war news. The French CAC 40 index was down 0.6% and the German DAX index declined by 0.7%. London's FTSE 100 index rose by a modest 0.03%, supported by higher oil company share prices.

Gold jumped 1.57% and crude oil surged more than 4%. This conflict and the subsequent spike in U.S. bond yields made the financial market "chaotic" for a long time.

8. October - U.S. Treasury Yields Soar

On October 26, the U.S. 10-year Treasury yields rose above 5%, the highest level since 2007, triggering global financial market turmoil. U.S. stock markets fell across the board, with the Nasdaq dropping by more than 2%, the largest one-day drop of the year by then. The U.S. dollar index rose for two consecutive trading days, with a tendency to hit a new high of 107. Most importantly, the event not only had a short-term impact but also sent the entire financial market into "chaos" in the following month.

9. December - The Turning Point of the Fed's Policy

On December 14, the Federal Reserve announced the results of its latest interest rate decision. Although it left interest rates unchanged, confirmed the possibility of a rate cut for the first time. The dot plot even showed that there would be three rate cuts in 2024. The rate-cut bets increased sharply. The dollar fell by nearly 2% in two trading days, and the Dow closed with the first record high since January 2022. Gold broke above the 2,000 mark in one fell swoop. Influenced by the Federal Reserve, the market expected that major central banks would also follow suit to cut interest rates and officially "announce" the end of the interest rate hike cycles.

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Ukadike Micheal

Palestinian-Israeli conflict

Economic

Amidst the ongoing conflict between Israel and Hamas, the stakes remain existential for both parties, raising doubts about the achievability of Israeli Prime Minister Benjamin Netanyahu's goal of Hamas's complete destruction. Despite the current military campaign, international pressure is mounting for a cease-fire to secure the release of Israeli hostages held by Hamas and provide humanitarian aid to Gaza.

The cease-fire terms proposed by Israel and Hamas are significantly apart, leaving the prospect of a deal uncertain and the duration of a potential cease-fire unclear. In the absence of an agreement, senior Israeli officers suggest a prolonged military engagement with Hamas, possibly lasting for several months or the entire year.

The challenge for Israel arises in the aftermath of potential military success. If a lengthy occupation is avoided, there is a risk of Hamas regenerating, while an extended stay could lead to a protracted insurgency. The complex dynamics are reminiscent of struggles faced by advanced industrial countries against irregular insurgent forces in recent decades, as seen in Afghanistan.

Hamas, with its distinctive advantages in Gaza, has cultivated capabilities over almost two decades, making the goal of its destruction challenging from a military standpoint. The organization's resilience is attributed to its control over a defined territory, a prepared tunnel network, and influence over the local population.

Experts contend that even if Israeli forces conquer all of Gaza, the complete elimination of Hamas is unlikely, given its nature as a political brand capable of regenerating its fighters and leaders. While Hamas revised its charter in 2017, dropping explicit calls for Israel's destruction, its long-term goal remains ambitious, seeking eventual control over the entire land between the River Jordan and the Mediterranean Sea.

Israeli leaders express skepticism about the possibility of a settlement with Hamas, emphasizing the group's goal to eliminate Israel. The recent Oct. 7 attack has solidified the belief among Israelis that Hamas is not inclined towards pragmatism or a peaceful resolution of the Israeli-Palestinian conflict.

The conflict's toll on both sides is significant, with casualties and economic damage causing concerns about the potential for a protracted and costly engagement. Despite the challenges and the deadliest day for Israel since the invasion began, public opinion in Israel remains supportive of the military campaign.

The ongoing struggle between Israel and Hamas appears to have no immediate resolution in sight. The complex geopolitical, military, and ideological factors involved make the situation challenging, with potential implications for the broader Middle East. As the conflict continues, the focus remains on finding a balance between security concerns and the pursuit of a lasting and sustainable solution.

Source: Wall Street Journal

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Ukadike Micheal

Economic

Fabio Panetta, a member of the European Central Bank's Governing Council, has emphasized the critical need for European nations to collectively issue bonds, stating that it is essential for the common currency, despite facing political resistance. In a speech in Riga, Latvia, Panetta highlighted the scarcity of safe euro-denominated assets as a significant constraint on the Capital Markets Union and the global influence of the euro, asserting that in a politically volatile world, a country issuing an international currency is less exposed to financial pressures from other potentially hostile nations.

The call for joint bond issuance comes at a time when Europe is grappling with geopolitical uncertainties, including the aftermath of Russia's war in Ukraine and concerns about the potential return of Donald Trump to the White House. ECB President Christine Lagarde has expressed the view that further integration is the best defense against another Trump term. However, the idea of common bond issuance faces resistance in countries like Germany, wary of pooling debt with nations they consider fiscally irresponsible.

Panetta identified the absence of a European safe asset and the lack of a fully fledged banking union as key limitations for a 'global euro.' While acknowledging the positive impact of Next Generation EU bonds, issued for post-pandemic recovery, he emphasized that a steady and predictable supply of 'safe assets' is essential to stimulate the development of the Capital Markets Union and strengthen the international role of the euro.

Panetta's plea for joint bond issuance underscores the broader challenges facing the Eurozone in achieving financial integration and global relevance. The debate over common bonds reflects not only economic considerations but also political sensitivities within the European Union. As Europe navigates geopolitical uncertainties, the fate of the euro remains intricately linked to the region's ability to address these challenges and foster greater financial cohesion.

This highlights the pressing need for European nations to collectively issue bonds, emphasizing the importance of a common currency and the challenges faced in achieving financial integration. Call for joint bond issuance underscores the complexities surrounding the development of a 'global euro' and the impact of geopolitical uncertainties on the region's financial stability.

From a technical standpoint, effectively outlines the implications of the scarcity of safe euro-denominated assets and the constraints it poses on the Capital Markets Union. It also provides insight into the potential impact of joint bond issuance on the global influence of the euro, particularly in mitigating financial pressures from other nations. Moreover, effectively captures the political resistance faced by the idea of common bond issuance, particularly from countries like Germany, and the broader implications of such resistance on the Eurozone's financial integration.

This successfully highlights the interplay between economic considerations and political sensitivities within the European Union, shedding light on the broader challenges facing the Eurozone. Furthermore, it conveys the significance of addressing limitations such as the absence of a European safe asset and the need for a fully fledged banking union in order to strengthen the international role of the euro.

Overall, provides a comprehensive overview of the complexities surrounding the call for joint bond issuance and the broader challenges facing the Eurozone, effectively capturing the technical and geopolitical dimensions of the issue.

Source: Bloomberg

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Ukadike Micheal

Economic

Stocks

The global financial markets exhibit a dynamic and interconnected nature, as evidenced by the recent contrasting performances of Asian and US equities. The initial trading day of the week saw Japanese equities embarking on a downward trend, influenced by Tokyo's consumer price index for January, which fell below expectations. The city's core CPI reading showed a growth of 1.6 per cent compared to December's 2.1 per cent, signaling potential concerns about economic stability. This discrepancy in inflation figures impacted the initial performance of Japanese equities, reflecting the intricate relationship between economic indicators and market sentiment.

Conversely, South Korea's Kospi index demonstrated resilience, witnessing a rise of 0.8 per cent. The index was buoyed by battery manufacturer LG Energy Solutions, which experienced a 4.8 per cent increase following its fourth-quarter earnings announcement. This positive corporate performance contributed to the index's upward trajectory, showcasing the impact of company-specific news on market movements.

In contrast, Hong Kong's Hang Seng index experienced a 0.2 per cent decline, while China's CSI 300 lost 0.4 per cent in early trading. These early challenges faced by the markets in Hong Kong and China further underscored the intricate interplay of economic factors and investor sentiment, highlighting the nuanced nature of global financial systems.

Meanwhile, the S&P 500 in the US surged to all-time highs on Thursday, fueled by stronger-than-expected gross domestic product data for the fourth quarter. The record-breaking performance of the S&P 500 underscored investor optimism fueled by robust economic indicators, demonstrating the significant impact of macroeconomic data on market movements.

The divergence in market trends across regions reflects the complex nature of the global financial landscape, where economic indicators, corporate performance, and investor sentiment intertwine to shape market outcomes. As markets continue to react to economic data and corporate earnings, investors remain vigilant for signs of sustainable growth and stability, emphasizing the importance of staying informed and adaptable in navigating the dynamic financial environment.

The contrasting fortunes of Asian and US markets serve as a reminder of the interconnectedness of global financial systems and the importance of monitoring both domestic and international developments. The volatility in Asian markets, juxtaposed with the record-breaking performance of the S&P 500, underscores the need for a comprehensive understanding of global economic dynamics and their impact on investment decisions.

While short-term fluctuations in equity markets are inevitable, the overarching goal for investors remains identifying opportunities for long-term growth and value creation. Amidst the ebb and flow of market sentiment, staying informed and adaptable is key to navigating the dynamic landscape of global finance.

The recent market movements highlight the intricate relationship between economic indicators, corporate performance, and investor sentiment in shaping global market outcomes. The interconnectedness of global financial systems underscores the need for a comprehensive and nuanced approach to investment decision-making, emphasizing the importance of monitoring both domestic and international developments. As markets continue to evolve, staying informed and adaptable remains crucial for investors seeking to navigate the dynamic landscape of global finance.