US employment figures significantly surpassed expectations, with a notable increase of 353,000 jobs, nearly double the anticipated amount. This surge, along with a 0.6% increase in average hourly earnings—also exceeding predictions by twofold—underscored the Federal Reserve’s hesitation to confirm market predictions of a rate decrease in March and a subsequent rapid rate reduction cycle. Following the Federal Open Market Committee (FOMC) meeting, the US dollar weakened amid declining US rates and emerging issues among regional and some international banks linked to the US real estate sector. However, the robust jobs report reversed this trend, leading to a sharp rise in US rates and a recovery of the dollar. Shares in US regional banks also found some footing.
The upcoming week is expected to be less eventful. The spotlight will be on the final January PMI, which typically doesn’t significantly impact markets. The Reserve Bank of Australia’s meeting is on the horizon, yet it’s considered premature to reverse the 25 basis point hike from last November. The Bank of Mexico is also set to meet, likely postponing the start of its easing cycle for at least another month, contrary to the actions taken by other regional central banks (Brazil, Chile, and Colombia) who continued their easing efforts last week. The start of China’s Lunar New Year on February 9 may temporarily halt the downturn in the CSI 300, which has declined by 7.7% this year, reaching a five-year low. Despite attempts to lift spirits through state fund purchases and new video game approvals, market sentiment remains low. Moreover, ongoing issues in the US commercial real estate sector have come to the forefront, with the KBW regional bank index dropping by approximately 7.3% last week, affecting both a Japanese bank and Germany’s largest bank, which notably increased its provisions against its US real estate exposures.
Following the Federal Open Market Committee (FOMC) meeting and the release of employment figures, the upcoming US economic agenda appears less packed, despite a significant influx of treasury offerings due to the Treasury’s quarterly refunding and the usual substantial bill supply. The conversation in certain circles has evolved from discussions on a potential soft landing or recession to possibilities of a no-landing scenario or economic reacceleration. The upcoming week’s lighter schedule features the final January services Purchasing Managers’ Index (PMI). The preliminary report indicated a fourth consecutive rise, reaching a peak of 52.9 since last June, marking the highest point. Although this figure is open to adjustments, any changes are typically minor. The Institute for Supply Management (ISM) services index, which has generally been lower than the PMI, is anticipated to show a slight increase (expected at 52.4 from 50.6).
Moreover, the outcomes of the senior loan officers’ survey on bank lending practices are set to be published on February 5th, providing insights into credit standards adjustments, which were reported to have tightened in the third quarter of 2023. The trade balance for December, scheduled for release on February 7th, may show a modest improvement in the goods deficit, as preliminary figures have indicated a decrease to $88.5 billion from $89.3 billion. Should this trend extend to the overall trade balance, the monthly US trade deficit for 2023 could average around $65 billion, a reduction from $78.6 billion in 2022. This improvement, particularly given the growth differentials and the perceived overvaluation of the US dollar, is noteworthy. It is speculated that this might be linked to inventory management strategies, as imports dropped by 1.7% in 2023. A yearly decline in imports is uncommon and often signals a recession.
Following the release of the preliminary Q4 GDP report, which showed no growth, and the initial estimate for January’s Consumer Price Index (CPI) indicating a 0.4% decrease for a year-over-year rate of 2.8%, the upcoming final Purchasing Managers’ Index (PMI) readings, the outcomes of the December European Central Bank (ECB) inflation survey, and the total retail sales figures are not expected to significantly contribute to the existing data pool. Historically, the euro has exhibited a trend of depreciating each February over the past seven years, though it’s important to note that small sample sizes can lead to skewed analyses. Over the last 20 Februarys, the euro has seen a decline in 12 of those years. However, this observed February pattern does not hold statistical significance at a 5% confidence level.
Last week, the euro reached its peak just slightly below $1.09, a few hours prior to the release of the US employment data. The currency experienced a sharp sell-off following the jobs report, dropping below $1.08, yet it narrowly managed to stay above the year’s lowest point, set just one day before, at $1.0780. Nonetheless, the euro ended the week below $1.08 for the first time since mid-December, suggesting potential targets at $1.0765 and possibly $1.0725. The previously dismissed possibility of reaching a $1.06 head-and-shoulders pattern may need to be revisited. In light of the FOMC meeting, there had been speculation that the anticipated interest rate adjustments might have concluded. However, the robust US jobs data reversed such expectations, leading to a resurgence of the US two-year yield premium over Germany to near three-week highs.
As expected, the Bank of England maintained its interest rate at 5.25% last week, leaving the base rate unchanged. The swaps market currently indicates a low probability (less than 15%) of a rate cut in the upcoming March meeting. However, expectations for a rate reduction improve by May, with about a 55% likelihood, and by August, two rate cuts are fully anticipated. It’s important to note that due to the significant increase in UK inflation from February to May last year, a notable decrease in the UK Consumer Price Index (CPI) is anticipated. The market has already factored in four rate cuts by the end of this year, with just over a 50% chance of an additional fifth cut of a quarter-point.
This week’s publication of the final service and composite Purchasing Managers’ Index (PMI) along with the construction PMI is not expected to significantly influence market movements.
Since mid-December, the British pound (Sterling) has fluctuated within a two-cent range between $1.26 and $1.28. It experienced a nearly 160-point range just before the weekend. Many might find it prudent to expect this range to hold until there is definitive evidence to the contrary, which would be signaled by a close outside of this range. There is a tendency to predict a downward break, potentially leading to a swift move towards the 200-day moving average (approximately $1.2565), followed by a test of the $1.2500 level—a threshold Sterling has not fallen below since last November.
The release of the Caixin services and composite Purchasing Managers’ Index (PMI) is scheduled for early Monday, but the main focus of the week will be on the Consumer Price Index (CPI) and Producer Price Index (PPI) data for January, expected at week’s end. Throughout the fourth quarter of 2023, the CPI remained negative, indicating subdued price pressures, largely influenced by declining food prices. In contrast, non-food prices saw a year-over-year increase of 0.5% in December, while food prices dropped by 3.7%. The core inflation rate remained stable at 0.8% in the third quarter and decreased to 0.6% during the fourth quarter of 2023. Bloomberg’s monthly survey presents a median forecast for China’s CPI this year at 1.1%, although deflation is anticipated to accelerate initially, with a median forecast of -0.5% following December’s -0.3%.
Producer prices have experienced deflation since the fourth quarter of 2022, failing to post a year-over-year increase since September 2022. The deflation rate has moderated since reaching its peak at -5.4% last June, standing at -2.7% in December. January’s figures are expected to show little change, with oil and iron ore prices holding steady, but steel and copper prices have weakened. Significant improvement in China’s producer prices may not be observed until the second half of 2024, potentially impacting industrial profitability negatively.
The People’s Bank of China (PBOC) is also set to announce its January reserve figures. Following the dollar’s rally and a bond sell-off, it’s likely that Chinese reserves have decreased for the first time in three months. The value of China’s reserves increased by almost $134 billion in the last two months of the previous year, benefiting from the dollar’s decline and a bond rally. A decline of approximately $60 billion would not be surprising. It’s also noteworthy that China’s Lunar New Year celebrations will close mainland markets starting from Friday, February 9, with markets reopening on Monday, February 19.
The dollar’s substantial gains following the January employment report suggest that Chinese authorities may need to intensify their efforts to prevent a downward spiral and maintain the yuan’s stability. The dollar has remained under CNY7.20 since late November, but this level could be challenged soon. Should the dollar surpass CNY7.20, the next target could be CNY7.23.
Market expectations are leaning towards the Bank of Japan (BOJ) moving away from its negative interest rate policy within the year, possibly as early as April. However, the economic justification for such a shift seems less convincing. Notably, the Consumer Price Index (CPI) in Tokyo, which often slightly surpasses national figures, dropped to 1.6% for both headline and core rates in January, below the BOJ’s target of 2% for the core rate.
Upcoming data releases, including December’s labor earnings early Tuesday, will provide further insight. November’s data saw revisions, indicating a 0.7% year-over-year rise in nominal cash earnings, up from an initial estimate of 0.2%, while real cash earnings decreased by 2.5% year-over-year, revised from an initial -3.0%. This decrease poses a significant challenge to household spending in Japan, which has not seen a year-over-year increase since October 2022. November witnessed a 2.9% decline in household spending, marking the largest drop in five months. Consumption figures, which showed contraction in both Q2 and Q4 of 2023, further underline the economic pressures. Additionally, a notable nearly 3% month-over-month decline in retail sales was reported for December, starkly contrasting with Bloomberg’s median forecast of a 0.2% increase.
An emerging trend in Japan is the increase in publicly traded companies offering equity as part of compensation packages to employees. According to Sumitomo Mitsui Trust, nearly 770 companies, or about 20% of listed entities, now have such programs, representing almost a sevenfold increase since 2015.
Furthermore, Japan’s current account balance, set to be reported on February 8, has historically deteriorated in December for the past 11 years. This comes despite Japan reporting a modest merchandise trade surplus for December, around JPY62.1 billion (approximately $422 million).
In currency markets, the US dollar saw a decline to JPY146 following a drop in US rates. However, the robust jobs report led to a surge in rates, driving a recovery in the dollar to nearly JPY148.60, marking a new high for the week. The previous month’s peak was near JPY148.80, with potential minor resistance levels ahead at JPY149.20 and then JPY150. The dollar has not surpassed JPY150 since mid-November, suggesting a keen watch on these levels for future movements.
The Canadian economy experienced a modest expansion of 0.2% in November, marking the first month of growth since May. After contracting at an annualized rate of 1.1% in the third quarter, preliminary estimates suggest a potential growth rate of 0.4% for the fourth quarter of 2023, with official data expected on February 29. The week begins with the release of the composite January Purchasing Managers’ Index (PMI), which has remained below the 50 threshold indicative of expansion since May 2023, reaching a new cyclical low of 44.7 in December. Conversely, the Ivey PMI demonstrated improvement throughout the fourth quarter of 2023, hitting 56.3 in December, its highest since April and a significant rise from 49.3 in December 2022.
The December merchandise trade balance, set to be reported on February 7, will also draw attention. In 2022, Canada boasted a goods trade surplus of approximately C$18 billion, which dwindled to C$4.4 billion through November 2023. However, the most crucial data point for the week is the January job report, scheduled for February 9. December saw a disappointing loss of 23.5k full-time positions. Throughout the last year, Canada generated 324k full-time jobs and approximately 432k jobs in total, lagging behind labor force growth and leading to an increase in the unemployment rate from 5.0% at the end of 2022 to 5.8% by the year’s end. Nonetheless, the average hourly wage for permanent workers saw increases in November and December, reaching 5.65%, the highest since August 2020. A weak recovery from December’s job market setback and slower wage growth could prompt market speculation to anticipate an earlier rate cut by the Bank of Canada, currently not fully expected until June.
In currency markets, the US dollar approached a support level identified around CAD1.3360, lingering near this point prior to the employment report. Following the report, the dollar surged to a new weekly high around CAD1.3475, just shy of the 200-day moving average. This movement challenges the previously anticipated double top pattern, which had suggested a potential drop to just below CAD1.3300. Should the dollar break above CAD1.3480, it could aim for the CAD1.3540 region, which previously acted as a resistance level for the currency last month.
The Reserve Bank of Australia’s (RBA) meeting on February 6 will be closely watched following the recent release of Q4 2023 CPI data, which showed inflation at 0.6% for the quarter, translating to a 4.1% year-over-year rate. This is the lowest inflation rate since the end of 2021, indicating that inflationary pressures are moderating while economic growth is decelerating. Despite these trends, RBA officials are not inclined to reverse the 25 basis point rate hike implemented last November. The combination of weak retail sales figures and subdued inflation has led market participants to anticipate the first rate cut as early as June, previously expected in September. The futures market now prices in two rate cuts for the year, with nearly a 60% chance of a third, marking the highest expectations for easing since early January. These expectations may adjust once the Federal Reserve starts to cut rates and given the Australian economy’s continued underperformance.
The RBA is also set to update its economic forecasts, previously projecting a growth rate of 1.8% for this year, up from an estimated 1.3% in 2023. The fourth quarter GDP for 2023 will not be reported until March 6. Additionally, the CPI is forecasted to moderate to 3.3% this year.
Following the release of the US employment data, the Australian dollar dropped to a new low for the year, slightly above $0.6500, as per Bloomberg data. Before the employment report, the Aussie was trading near its session highs around $0.6610. The $0.6500 level aligns with the 61.8% retracement objective of the Aussie dollar’s six-cent rally from last year’s low of approximately $0.6270 in late October. A fall below this level initially targets $0.6450, signaling potential further downside for the Australian dollar in the near term.