So, what do we know?
(A forex, index, and commodity market review)
Key US stock indices recovered from the losses suffered from the previous shortened week. Despite above consensus print on US inflation in December, the S&P500 and Nasdaq indices recovered nearly all of their losses from the start of the year.
Weekly change (amount change and percentage change on the week)
FTSE -39 -0.51%
DAX +130 +0.78%
DOW +76 +0.20%
S&P +78 +1.66%
NASDQ +500 +3.06%
NIKKEI +2132 +6.37%
Hang Seng -266 -1.61%
There were some notable moves last week. Not least in the key US indices that all investors track. Despite worse than expected US inflation, the NASDAQ recovered just over 3%, despite comments from the Atlanta Fed President, Raphael Bostic, who said that interest rates would likely stay higher for longer than the markets were anticipating.
Bostic said he was “expecting to see much slower progression of inflation moving forward” and further said he expected rates would need to remain on hold until the September meeting. There is still a significant gap in interest rate expectations between the hawkish FOMC and the optimistic market.
Current projections from the CME Fed Watch tool have the target interest rate falling to 4%-4.25% by September. Currently interest rates are at 5% - 5.25% band.
The FED’s preferred measure of inflation, the PCE report which is impacted less by shelter / accommodation costs, is released a few days before the FOMC first meeting of the year on 31st January. Whilst no change is expected it will help inform the committee about the challenge of lowering inflation to the FED’s 2% target.
Investors and traders are factoring in a slowdown in economic activity in the US in H1, although the attacks on shipping by the Houthis in Yemen could still result in a spike in inflation as most freight that usually takes the Red Sea route are now taking the much longer and much costlier route around the Cape of Good Hope.
News that the US and a coalition of partners, including the UK, attacked Houthi launch and radar sites may offer little comfort to the markets as the Houthis are well organised and well funded and may well continue to mount attacks on ships off the Yemen coast. The concern that the conflict in Gaza is spreading is one that the Arab world acknowledges although the US and its allies have made
it very clear that the attacks on the Houthis have nothing to do with the Israel / Hamas conflict in Gaza.
The performance of major indices in the first days of trading in the New Year can often influence or decide how the year will pan out. Last week was the first full week’s trading and many bulls will be comforted by the turn-around last week, despite hawkish inflation comments and the global macro events that have added much more uncertainty into many projections for the year.
The outstanding market move last week was not in the West but in Japan as the Nikkei rallied a whopping 6.37%, beating the highs from late 2021 to record its highest level since 1990. There were concerns that the Bank of Japan would abandon its ultra-loose monetary policy that it has continued to pursue despite a global resurgence in inflation. The Nikkei rallied 28% last year and many analysts feared that if Japanese rates went up the Nikkei would fall as the Japanese yen would rally, hurting Japanese exports.
The change in sentiment last week was because of the New Year’s Day earthquake that had a big effect on investors’ expectations. This may be a case of a delay in the BoJ’s rate plans rather than a volte face.
EURUSD +0.08 +0.07% GBPUSD +0.32 +0.25% USDJPY +0.29 +0.20%
The US Dollar was flat last week as investors absorbed the worse than expected inflation data and the hawkish comments from the Atlanta Fed’s Bostic. Seasonal trends tend to favour the US Dollar in January with 60% of the last 20 years being positive.
Gold +4 +0.19%
UK OIL -0.57 -0.72%
US OIL -1.01 -1.37%
An interesting week for oil as the US tried to prevent a widening in the Israel / Gaza conflict which is being threatened by both the Houthis in Yemen and Hezbollah in southern Lebanon – both groups funded largely by Iran. Many commentators acknowledge that the conflict has already spread outside Gaza, but that the US would argue is what the militant groups and Iran have wanted from the outset.
What don’t we know….yet?
(What traders need to look out for in the week ahead)
A busier week for markets with the World Economic Forum starting in Davos and the first of the republican Primaries where Republican party members decide who they would like to be the candidate for the November Presidential election. Key data releases this week include UK inflation data and manufacturing and consumer sentiment data from the US.
Monday
Switzerland World Economic Forum meets in Davos this week. Closed sessions but media swarm over the resort as politicians and financial heavyweights tackle the global macro challenges shaping our world.
US Federal Holiday for Martin Luther King Day. US Exchanges closed with lower liquidity expected in European markets.
Tuesday
UK Employment report. Claimant count and average hourly earnings. The monthly claimant count stays moderate whilst earnings are declining slightly but remain above inflation. GBP sensitive.
US Empire State Manufacturing. First of two reports this week with an improvement expected on both counts. -4.9 expected.
UK Governor of the Bank of England Andrew Bailey testifying on the UK economy before the Lords Economic Affairs Committee. GBP and UK assets sensitive.
Wednesday
China Industrial production, retail sales and Q4 GDP data. An improvement expected from the official statistics.
UK CPI Inflation data. Services inflation may prove the sticking point as progress in combatting inflation becomes tougher. Headline expected at 3.8% versus 3.9% last time. Core inflation expected to remain above 5%. A stronger than expected number will likely delay rate cuts until mid-year. GBP and UK assets very sensitive to this release.
US Core retail sales. No surprises expected here. The US consumer has cooled since Q3 last year but sales still holding up.
Thursday
US Philly Fed Manufacturing Index. The second sector report – expected at -6.9 as manufacturing continues to struggle, whilst showing gradual signs of improvement.
Friday
UK Retail sales. A strong performance in November during black Friday sales looks to be followed up by a poorer showing in December with non-food sales slower. GBP sensitive.
US Prelim University of Michigan Consumer Sentiment. Expected at 69.3 versus 69.7 last month. Consumer inflation expectations also released. Last at 3.1%.
