So, what do we know?
(A forex, index, and commodity market review)
US inflation fell less than expected last week further dampening hopes of a cut in IS rates in the next three months. Conversely UK inflation remained unexpectedly at 4%, lower than the forecast 4.1% whilst core inflation remained steady at 5.1%
Weekly change (amount change and percentage change on the week)
FTSE +104 +1.37%
DAX +116 +0.68%
DOW -74 -0.19%
S&P -26 -0.52%
NASDQ -300 -1.67%
NIKKEI +1,125 +3.02%
Hang Seng +630 +4.00%
UK markets had a better week following news that inflation was lower than forecast, at an unchanged rate of 4%. Markets had expected a higher print and reacted to the unchanged rate with an increase in the probability of the first rate cut in June to 65% from 40% just before the release. Despite the positive news on the inflation data, one the new appointees to the BoE’s Monetary Policy Committee, Meagan Greene, said that said that “in light of the persistence of UK wage and services price pressures . . . I think policy will need to remain restrictive for some time.” Despite the hawkish comment from one member of the MPC, analysts still expect the UK to cut rates in June, in line with likely moves from the federal Reserve and the European Central Bank.
US inflation disappointed markets last week, with headline inflation up 0.3% on the month and 3.1% year on year - stronger than the +0.2% and 2.9% readings expected. Core inflation which excludes the volatile energy and food components, was unchanged at 3.9% year on year and up 0.4% from the previous month also stronger than expected. Forward interest rate contracts rose whilst treasury yields fell as traders continued to dial back when they expected the Federal Reserve to start cutting interest rates. Traders now expect the first rate cut to be in early June whilst a month ago traders still expected the first rate cut to be in March. That seems a long way off as the fed has signalled only three rate cuts this year rather that the wildly optimistic 7 cuts that the markets were expecting at the start of the year. This readjustment is close to running its course as the forward rates imply just 3 to 4 cuts by the December meeting which is much more in line with Fed projections.
Japanese markets continue to power ahead with the Nikkei rallying a further 3% last week. The news that Japan’s economy shrank for the second consequitive quarter helped pushed the Japanese yen lower versus all majors as the news complicated the interest rate outlook. The Bank of Japan had been expected to raise rates in April which would have brought an end to the ultra-loose monetary policy that the BoJ have pursued which has been at odds with all other central banks. The weaker yen and reduced probability of a rate increase helped push the Nikkei into further multi year highs.
EURUSD Unchanged
GBPUSD -0.27 -0.21%
USDJPY +0.95 +0.64%
Movements in the foreign exchange markets were again dominated by the outlook for interest rates in the US, UK, and Japan. GBP / USD traded down close to the year’s lows as inflation data caused bets to increase for a rate cut in June. Combined with the expectation that the Federal Reserve would not be cutting rates until June. Lower interest rates generally feed through to a weaker currency whilst higher rates lead to a stronger currency.
The same scenario also effected the Japanese yen which reacted to the surprisingly poor Q4 GDP data which contracted 0.4%, versus predictions for a rise of 0.2%, thus impacting expectations of a rate increase by the BoJ in April.
Gold -11 -0.54%
UK OIL +1.19 +1.46%
US OIL +1.73 +2.26%
Gold reacted to the continuing appreciation in the US Dollar in the face of stronger inflation readings. Gold is priced in US Dollars and when the US Dollar strengthens, anything priced in US Dollars will fall. Gold is no exception.
Brent Oil rose another 1.5% as the escalation in the middle east shows little to no signs of being resolved with expectations of a further escalation as Israel contemplates a ground offensive against Rafah at the southern end of Gaza, where 1.5 million people have fled.
This week’s data and events
(What traders need to look out for in the week ahead)
Chinese markets reopen this week following the Ulnar New Year celebrations. US markets are closed Monday in observance of Presidents Day. With no major central bank policy meetings, traders will focus on manufacturing and services PMI data. We also have the release of the FOMC minutes from the FOMC meeting held on January 31st.
Monday
US Federal Holiday – Markets closed in observance of Presidents Day.
Tuesday
China Interest policy announcement. Expect small cut in 5-year loan rate to 4.10%
UK Bank of England Governor and MPC members testifying on inflation and the economic outlook before Parliament's Treasury Committee. GBP sensitive.
Wednesday
US FOMC minutes from last policy meeting held on January 21st. Since this last meeting, traders have dialled back their overly dovish stance on rate cuts this year as both inflation readings and very strong employment reports dash hopes of any rate cuts before June. To that extent the minutes are unlikely to further upset current projections. USD and US assets sensitive to this release.
Thursday
UK, EU &US Flash Manufacturing and Services PMI data. A modest improvement in both sectors expected in both UK and EU. US readings expected to decline from January’s revised numbers.
Friday
Germany German IFO Business Climate Survey. Broad based survey of manufacturers, builders, wholesalers, services, and retailers. Results over the past 6 months have been tracking sideways as the German economy struggles with depressed sales in its key target market of China having weathered the disruption and inflationary effects of the energy crisis sparked by the war in Ukraine two years ago. The Chinese economy is starting to show signs of stabilising although few businesses are struggling to raise prices as the economy navigates its way through a period of deflation.
Q4 earnings
Q4 Earnings releases from Walmart (Tuesday) and Nvidia (Wednesday) . Nvidia, having originally purposed its super-chip to be used in crypto mining, finds itself as the US’s third largest company – worth $1.8 trln. Nvidia has soared in value by over 500% since 2022 on the back of the excitement generated by AI. Has some parallels with the Crypto boom but the real-world applications for AI are much broader based than Crypto.
