Summary:
Following weeks of gains and a strong finish to 2023, markets experienced a correction as investors reevaluated the probability of early 2024 rate cuts. The belief that the Federal Reserve (Fed) would implement rate cuts led to a year-end rally, but last week saw a modest correction amid positive EU inflation data and a robust US payrolls report. The US added 216,000 jobs in December, though a downward revision of 71,000 to previous months raised concerns. Despite a fall in the unemployment rate to 3.7%, a sharp decline in the participation rate and a rise in wage growth indicated a tight US labor market.
Leading into the data release, markets had priced in a 73.8% probability of a March rate cut, a seemingly high probability given the strong performance of the US economy relative to the EU, where inflation is similar but economic conditions are more challenging.
Key Data and Rate Cut Speculation:
The ISM services data for December, showing a slowdown in hiring, contributed to concerns, while the headline number and elevated prices paid suggested lingering price pressures. The upcoming focus is on the December Consumer Price Index (CPI) numbers, which could influence speculation about a March rate cut. A rebound in yields and a stronger US dollar last week hinted at a reassessment of rate cut expectations.
Global Market Reactions:
Global markets saw a correction, with the DAX posting its largest weekly loss since October, and the FTSE100 its biggest loss since November. European markets, reacting to a rebound in inflation and better-than-expected economic data, witnessed a retreat as traders scaled back rate cut expectations.
Upcoming Events and Diverging Views on Inflation:
This week holds anticipation for the US CPI report, China’s inflation, and trade numbers for December. Divergent opinions on inflation are emerging, with concerns about rising inflationary pressures alongside deflationary pressures from China’s economic slowdown.
Central Bank Dilemma:
Central banks appear hesitant to ease monetary policy, given the conflicting signals in inflation trends. The markets, however, have already priced in rate cuts, evident in the decline in yields since October.
Technical Outlook (Selected Pairs and Indices):
EUR/USD: Potential upward movement while above 200-day SMA at 1.0830, with a break above 1.1030 targeting December peaks at 1.1140.
GBP/USD: Remains in an uptrend from October lows, with support above 1.2600. Potential for further gains while above the 200-day SMA and support at 1.2590, targeting 1.3000.
EUR/GBP: Range-bound with resistance at 0.8720 and support at 0.8570/80. Downside bias while below 0.8670.
USD/JPY: Vulnerable to a pullback towards the 200-day SMA at 143.20, with support at 140.00.
FTSE 100: Expected to open 17 points lower at 7,674.
DAX: Expected to open 6 points lower at 16,588.
CAC40: Expected to open 12 points lower at 7,408.
Conclusion:
Markets are reassessing rate cut expectations as economic data presents a mixed picture. The upcoming CPI report and global economic indicators will likely play a crucial role in shaping market sentiment. Central banks face a dilemma in managing conflicting inflation signals, and the technical outlook for selected pairs and indices suggests potential movements based on key support and resistance levels.
