Navigating the Red Sea: Ships Persist Despite US Cautions

Economic

Palestinian-Israeli conflict

Summary:

Despite Western naval warnings to steer clear of the vital trade route amid Houthi threats, an abundance of merchant vessels persists in traversing the southern Red Sea. The high-stakes cat-and-mouse game unfolds as ships defy caution, navigating through the region's strategic waters. Tensions rise as the Red Sea remains a contested passage for maritime traffic.

Warnings from Western navies urging merchant ships to avoid the southern Red Sea due to potential Houthi militant attacks have seen mixed compliance. The Combined Maritime Forces, comprising UK and US navies, issued the advisory after both nations targeted Yemen to curb Houthi threats against commercial vessels. Despite a notable decrease in ship traffic through the Bab el-Mandeb, 114 vessels, including oil tankers, bulk carriers, and container ships, still ventured through the chokepoint. This figure, while reduced, underscores varying risk tolerances among shipowners and the complex dynamics at play.

Following the advisory, ship-tracking data reveals a more than 50% decline in vessels passing through the Red Sea compared to the previous month. Notably, the number of ships transporting Russian oil has decreased less significantly, indicating nuanced risk assessments. Some vessels emphasize connections to China in hopes of safer passage, while others clarify their lack of involvement in trade with Israel.

Gas carriers witness the most substantial reduction, plummeting by 96% in the past month. Container ships and unclassified vessels follow suit, both experiencing an approximately 80% decline. Oil tankers, though impacted, see a 55% reduction, while bulk carriers display the least impact with a 25% decrease from the previous month.

As tensions persist, more than 20 ships linger to the east of the Gulf of Aden, some altering course after the Combined Maritime Forces issued their warning. This scenario underscores the intricate decision-making processes of shipowners amid heightened geopolitical risks. Navigating the Red Sea: Ships Persist Despite US Cautions_1

Navigating the Red Sea: Ships Persist Despite US Cautions_1

The southern Red Sea's maritime landscape reflects a delicate balance between heeding naval warnings and the practicalities of global trade. The diverse risk assessments among shipowners contribute to the nuanced response, creating a dynamic situation in a crucial trade route. The ongoing developments underscore the evolving nature of maritime security challenges and the adaptability required in the face of geopolitical uncertainties.

Source: Bloomberg

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Ukadike Micheal

Economic

Forex

UK wage growth sharply decelerated, reaching one of the fastest paces on record but lingering at a level that keeps inflation concerns alive at the Bank of England (BOE). Regular pay growth, excluding bonuses, dipped to 6.6% in the three months through November, meeting expectations and down from a revised 7.2% in the previous quarter. This decline adds weight to the argument for an early interest rate cut, with economists predicting inflation nearing the BOE's 2% target by spring.

The pound extended losses post-release, dropping 0.5% to $1.2663, a more than one-week low. Investors anticipate a BOE shift towards rate cuts in May as attention pivots from inflation to the sluggish economy. Despite this, Governor Andrew Bailey emphasizes the BOE's commitment to a "higher for longer" approach, citing the need for further assurance in containing price pressures.

Chancellor of the Exchequer highlights that households are starting to feel better off, supported by an increase in real living standards. These figures may aid the ruling Conservative Party in narrowing the gap with the Labour opposition in polls ahead of an anticipated general election later this year.

Real wages have grown for the fifth consecutive month, alongside a record cut to National Insurance, contributing nearly £1,000 to a typical household with two working individuals. Regular pay, adjusted for CPI inflation, rose by 1.4% in the three months through November, marking the fastest pace since January 2020, excluding pandemic-related distortions.

The easing in wage growth, matching the fastest drop in records since 2001, is significant. However, the BOE contends that wage growth remains well above the level compatible with its 2% inflation target. Experimental data from the ONS shows unemployment holding at 4.2%, with vacancies decreasing by 49,000 in the quarter to December to 934,000, indicating a further slackening in the job market.

Employee payroll numbers dropped by 24,000 in the quarter through December, following a revised increase of 9,000 the previous month. Employment, according to experimental data, picked up to 75.8% of working-age adults. The ONS reported 69,000 working days lost to strikes in November, the lowest in 18 months, although industrial action returned as a drag on the economy in December and January.

Economists foresee inflation approaching the BOE's 2% target by spring, easing from 3.6% in the first quarter of 2024 to 2.1% in the second quarter. The cooling price pressures are now expected to lead to the first rate cut in the second quarter, with projections of further reductions bringing the BOE's key lending rate to 4.25% in the fourth quarter.

The UK faces a delicate balance as wage growth slows, prompting inflation concerns and potential BOE rate cuts. The economic landscape, marked by declining vacancies and payroll numbers, poses challenges that policymakers must navigate, with implications for households and political dynamics.

Source: Bloomberg

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Swissquote

Economic

I sense that the first quarter of this year will be marked by the realization that it's too early for the central banks to cut the interest rates unless something really bad – like another bank crisis, or a real estate crisis, or another debt crisis hits the fan. Because March – where market prices reflect the first rate cuts from both the Federal Reserve (Fed) and the European Central Bank (ECB) – is about two months away, and things don't look *that* bad.

In Europe, growth is slowing, Germany is struggling to reverse slow down, the slump in the Eurozone's industrial production accelerated, and production fell 6.8% in November from a year earlier. Over the last 9 readings, only one came in positive, and it was a small 0.2% growth back in June. But economic slowdown is what the ECB needs to pull inflation lower. And unless there is a sharp slowdown in economic activity, the ECB won't hurry up to cut rates. On the contrary, the bank is now focused on waning the pandemic era aid programs. And according to a recent Bloomberg survey, the ECB will make four 25bp cuts this year starting in June instead of six rate cuts starting from April – as priced in by the markets.

In the US, the resilient growth, healthy jobs market and sustained fiscal spending into the presidential election suggest no urge for a Fed cut in March.

The divergence between the reason and market pricing suggests that the rate cut expectations will be gently delayed and pricing will be revisited.

If that's the case, stock and bond markets should correct to the downside, and the US dollar should recover.

Calling a spade, a spade

The US dollar kicked off this week on a positive note, as the EURUSD made a swift move to the downside following ECB Holzmann's words in Davos yesterday. Holzmann warned that the threats from looming inflation will likely prevent the ECB from lowering the rates this year, even as a recession can no longer be ruled out. He pointed at the conflict in the Middle East as a risk for further disruption to supply chains and energy markets and cautioned that the latter developments will likely keep ECB alert regarding the price risks. The euro fell and the Stoxx 600 retreated.

One thing that prevents inflation worries from darkening the mood is the subdued reaction from oil markets. The escalation of the conflict in the Red Sea region no longer fuels oil prices. Despite news of further attacks and retaliation, US crude saw limited upside yesterday and closed the session slightly lower. Resistance remains intact into $75pb level.

But if inflation worries resurface, weak economic data will no longer fuel the central bank doves and act as good news.

The EURUSD has potential to fall further. The next natural target for the euro bears stands at 1.0875, the major 38.2% Fibonacci retracement on the latest rebound that started in October. Below this level, the EURUSD will step into the medium-term bearish consolidation zone. Cable could return below 1.25, and the USDJPY could make an attempt on the 100-DMA – near 147.40. But the consensus for the USDJPY remains bearish as the Bank of Japan (BoJ) should exit the negative rate policy. Japanese policymakers could be further encouraged to act in case of strong annual wage-negotiation results.

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

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FxPro Group

Stocks

US equity indices declined in the first five trading sessions of January. This dynamic promises a challenging year for the stock market, according to the old "first five days" rule.

Identifying a defining trend would have been an easy task if not for stabilisation on the day of the NFP release on January 5 and a strong rally on January 8.

The "first five days" rule was popularised by Jim O'Neil during his time working for investment banks. Don't limit yourself to this rule for the entire year, but consider it as a sentiment for the year.

The last time this method misfired was in 2018, but after that, it correctly determined five times whether the S&P500 would end the year up or down. The indicator also predicted a decline in 2016, but that was a year of growth after the prolonged stagnation of 2015 and an 11% plunge in January.

We now tend to agree with the "first five days" sentiment. The S&P500 index broke the highs of late last week and was only 0.8% away from an all-time high.

'First Five Days' Rule Points to a Challenging Year_1

The US stock market was near highs last week as markets strengthened on expectations of more aggressive rate cuts from the Fed. Currently, rate futures see a cut at every meeting since March as the main scenario. The driver has been weaker ISM services and producer price indices, but the usually weightier, stronger employment and consumer inflation data is ignored.

In addition, we are dismayed to see that the level of greed in the markets has bordered on extreme greed over the past month. Declines out of extreme greed often precede corrections and sometimes give rise to bear markets.

'First Five Days' Rule Points to a Challenging Year_2

It may well be that the bulls squeezed everything they could out of the last rally, including abundant short-squeezes from recession-expecting bears and extremely dovish expectations from the Fed for this year.

The coming year may prove to be as challenging and clear-cut as the first five trading sessions have been, but still more indicators point to a correction than a continued rally, at least in the coming weeks.

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ING

Forex

USD: Fed's Waller speech will be important for the dollar

European FX starts the day on the back foot. Asian equities are off on the back of further poor sentiment out of China. From what we can gather it seems that a new, specialised funding list for property developers announced by one of the Chinese banks has raised some doubts about a softening of credit conditions. USD/CNH has traded to 7.20 – the top of a two-month trading range – and a softer renminbi has taken Asian currencies with it. Events in the Middle East are also being cautiously monitored, although it is important to say that energy markets remain quite orderly, and European natural gas has actually dropped below EUR30/Mwh, a very welcome development for European industry.

Onto the day ahead, what catches our eye is a 5:00 pm CET speech from the Federal Reserve's Christopher Waller. Recall that he delivered the definitive and market-moving "something appears to be giving" speech in late November. Back then, it concluded that the conflict between strong US growth and disinflation appeared to be resolving in the favour of disinflation. The speech provided an important lead indicator for the Fed's dovish turn at the December FOMC meeting. We presume today that he will stick to that same core message of successful disinflation and will not want to get involved in the fine-tuning of discussing a 2024 easing cycle, but not starting in March. We thus see event risk as a benign one – slightly negative for the dollar and positive for risk.

We also note an overnight story from the Wall Street Journal's Nick Timiraos that the Fed could consider slowing its Quantitative Tightening scheme – US $60bn in US Treasuries currently rolling off the Fed's balance sheet each month – at coming meetings. It is not clear whether this could be on the agenda for the 31 January meeting, but it would also support the less hawkish stance from the Fed announced above.

DXY has clear resistance at 103.10/20 and the case we have outlined above suggests that these levels may well prove the top of the day's trading range. If we are wrong and Waller has been sent out to push back against aggressive easing expectations (markets price 18bp of a 25bp first cut in March and 158bp of easing this year) then DXY can break resistance and head to the 104.00/25 area multi-day.

EUR: ECB pushback underway

The euro is not exactly showing it, but we have started to see some aggressive push-back from European Central Bank hawks against the 150bp of easing expectations priced in by the markets this year. Both Joachim Nagel and Robert Holzmann warned that rate cuts are not guaranteed this year. European interest rates have barely budged on the news and are probably more interested in thoughts from centrists such as Francois Villeroy de Galhau, who speaks this morning, and ECB President Christine Lagarde who speaks early in Davos tomorrow.

Also playing a role here could be some data where today's 10:00 am CET release of the ECB's one-year and three-year CPI consumer expectations survey could modestly reprice the cycle should they come in on the strong side. We put out a note last week that the biggest beneficiary of a less dovish repricing of the ECB cycle could be EUR/CHF. And we recommended a three-month EUR/CHF target at 0.96.

For EUR/USD, there is clean support at 1.0875/80. As above with the DXY, we think the Waller speech could see that support level hold and EUR/USD end higher on the day. If we are wrong about the contents of that speech, a break of 1.0875 opens up 1.0800 on the day.

GBP: Average earnings weighs on sterling

EUR/GBP has edged a little higher in early Europe on the release of UK average earnings data for November. These dipped to a 6.5% 3m/YoY rate – the lowest since last March. Our UK economist James Smith warns that we should not get carried away with this data, however, and that a more important release for the Bank of England will be the December CPI release tomorrow.

Look out for testimony from BoE Governor Andrew Bailey today at 4:00 pm CET. The BoE is not known for over-communication between meetings, but markets now price 130bp of BoE easing this year. If there is pushback against that from Governor Bailey and we are correct with our dollar call today, GBP/USD could turn back to the 1.2750/2800 area.

CEE: Zloty tests weakest levels since November

The CEE region opened the week yesterday with losses across the board, and only the Hungarian forint (HUF) managed to reverse losses to a flat result. As we mentioned yesterday, bearish pressures have arrived in the region, and for now they're here to stay. Yesterday's final inflation estimate in Poland showed a small upward revision of 0.1pp to 6.2% year-on-year. The core component for December will be released today, where we expect a drop from 7.3% to 6.9% YoY. Otherwise, the calendar is empty.

The Czech koruna (CZK) is following the rate move and for now, it looks like we should stay below 24.700 EUR/CZK. HUF seems the most resilient in the region at the moment. Rates seem to have stabilised after almost two weeks of rally. In our view,however, there is still a gap between FX and the rates market that will have to be closed sooner or later. Therefore, we remain negative on HUF these days with EUR/HUF above 380.

More interesting will be developments in Poland, where it seems that the political story is starting to interfere with the sentiment in financial markets. With the Polish zloty (PLN) being the only currency supported by higher rates these days, EUR/PLN briefly tested the highest levels since last November. With a hawkish National Bank of Poland, the IRS curve would indicate EUR/PLN levels more around 4.320. It seems that political noise and heavy long positioning will make PLN suffer in the coming days given that the political story in Poland seems to be just beginning.

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Samantha Luan

Economic

Forex

Central Bank

Dollar rises broadly on risk-off sentiment today, as as Hong Kong stocks led the region lower. The greenback's strength comes despite growing calls for Fed to initiate policy loosening earlier. Notably, Goldman Sachs has joined this chorus, predicting an initial rate cut as early as March and a total of five cuts throughout the year. Concurrently, US 10-year yield has also breached the 4% mark, riding on the overall market sentiment.

The greenback's surge was particularly pronounced against risk-sensitive currencies. Australian and New Zealand Dollar led the decline, with Aussie facing additional pressure from disappointing consumer sentiment data. Canadian Dollar, though showed relative resilience as markets eagerly await Canada's CPI data. On the other hand, Japanese Yen emerged as the second strongest after the Dollar, supported partly by Japan's PPI reading, which, despite falling to its lowest level in nearly two years, still exceeded market expectations.

In the European currency space, Sterling is currently the weakest performer. Market participants are closely watching the upcoming UK employment data, with particular focus on wages growth. Given UK's current CPI level of 3.9%, robust wages growth could potentially hinder the disinflation progress and compel BoE to maintain its current interest rate for a longer period.

From a technical analysis standpoint, EUR/GBP is a pair to watch as Sterling reacts to UK job data. For now, the favored case is that fall from 0.8713 is resuming the larger down trend. As long as 0.8638 minor resistance holds, deeper decline is expected to 0.8548 support first. Firm break there will push EUR/GBP through 0.8491 low to 61.8% projection of 0.8977 to 0.8491 from 0.8764 at 0.8464 next. This week's UK economic data will be pivotal in either reinforcing or challenging this bearish outlook for Sterling. Dollar Defies Increasing Rate Cut Expectations, Gains Ground on Risk-Off Sentiment_1

Dollar Defies Increasing Rate Cut Expectations, Gains Ground on Risk-Off Sentiment_1

In Asia, at the time of writing, Nikkei is down -0.62%. Hong Kong HSI is down -1.90%. China Shanghai SSE is down -0.67%. Singapore Strait Times is down -0.29%. Japan 10-year JGB yield is up 0.0258 at 0.583.

Japan's PPI slowed to 0.0% yoy in Dec, reflecting subsidy effects

Japan's PPI records a slowdown from 0.3% yoy to 0.0% yoy in December, above expectation of -0.3% yoy. Nevertheless, this figure represents the lowest PPI reading since -0.9% yoy decline in February 2021.

The deceleration in Japan's wholesale prices can be attributed partially to the government's intervention in the form of subsidies aimed at curbing petrol and utility bills. According to a BoJ official, these subsidies reduced wholesale inflation rate by approximately 0.9 percentage points.

In terms of trade-related price indices, there was a slight increase in export price index from 1.0% yoy to 1.1% yoy. Import price index improved from -10.1% yoy to -9.5% yoy.

On a month-over-month basis, the PPI rose by 0.3% mom, Meanwhile, export price index saw a marginal decline of -0.1% mom, and import price index was flat.

Australia's Westpac consumer sentiment plunges to 81, bleakest start since 90s

Australia's Westpac Consumer Sentiment index dropped by -1.3% mom to 81 in January. This figure is especially significant as it ranks in the bottom 7% of all observations since the inception of the survey in the mid-1970s. The only other instances of more pessimistic starts to the year were observed during the severe recession of the early 1990s.

Westpac attributed this "intense pressure" on consumers to surging cost of living, significantly higher interest rates, and increased tax burden, all of which are collectively impacting consumer incomes.

Despite the subdued consumer sentiment, Westpac highlighted that high inflation remains the primary concern for RBA. This focus on inflation suggests that the upcoming quarterly CPI release at the end of January will be a crucial determinant of RBA's policy decision in February.

"On balance, we expect the RBA to leave rates unchanged in February, and to be unlikely to raise rates further from here," Westpac noted. However, it also cautioned that an unexpected surge in inflation could complicate the decision, making it "a more finely balanced decision".

NZIER survey reveals improved business outlook and steady RBNZ policy anticipated

The latest quarterly survey of business opinion by New Zealand Institute of Economic Research revealed notable improvement in business sentiment. Only a net 2% of firms now expect general business conditions to deteriorate, compared to the 52% pessimism recorded in the previous quarter.

Christina Leung, principal economist at NZIER, expressed confidence that inflation in New Zealand is on track to return to RBNZ's target range of 1% to 3% by the second half of 2024, with a projection of reaching 2% in the first half of 2025.

"It's a pretty encouraging picture for the Reserve Bank and it reinforces our expectations that there won't be further increases," in interest rate, Leung stated.

However, Leung also mentioned that NZIER does not anticipate a reduction in the cash rate until the middle of the next year, advocating for a "wait and see approach." This cautious stance reflects a recognition of the need to monitor economic trends before making significant policy changes.

Looking ahead

UK employment data and German ZEW economic sentiment are the main focuses in European sesion. Later in the day, Canada CPI and US Empire statemanufacturing index will take center stage.

AUD/USD Daily Report

AUD/USD's decline from 0.6870 resumed by breaking through 0.6639 support. Intraday bias is back on the downside. Deeper fall should be seen to 61.8% retracement of 0.6269 to 0.6870 at 0.6497 next. On the upside, break of 0.6728 is needed to indicate completion of the decline. Otherwise, further fall would remain in favor in case of recovery. Dollar Defies Increasing Rate Cut Expectations, Gains Ground on Risk-Off Sentiment_2

Dollar Defies Increasing Rate Cut Expectations, Gains Ground on Risk-Off Sentiment_2

In the bigger picture, price actions from 0.6169 (2022 low) could be just a medium term corrective pattern to the down trend from 0.8006 (2021 high). Rise from 0.6269 is seen as the third leg of the pattern that could target 0.7156 on break of 0.6894 resistance. For now, range trading should be seen between 0.6169 and 0.7156 (2023 high), until further developments. Dollar Defies Increasing Rate Cut Expectations, Gains Ground on Risk-Off Sentiment_3