The past week has been an eventful one for global markets. The market’s focus has been on the Federal Reserve, and Fed Chairman Powell said something that the market largely did not expect: a rate cut in March is not the “base case.”
Although inflation has fallen sharply, Powell downplayed speculation that a rate cut is imminent, saying the Fed is still not fully convinced that it has won the war. He pointed out that solid economic growth, resilient consumer spending and a tight labor market are likely to keep inflation above 2% for some time.
His message may be that interest rates will eventually fall, but not as quickly as the market would like. As a result, traders scaled back bets on a rate cut in March, from 60% to around 35%.
The strong non-farm payrolls released on Friday dealt a heavy blow to expectations for a rate cut in March. The swap market showed a decline in bets on a rate cut by the Fed in March, and the Fed is no longer fully pricing in a rate cut in May.
However, the market has not changed its view on the total number of rate cuts this year, and believes that the Fed has only postponed the timing of rate cuts, and it is expected that there will still be nearly six rate cuts this year.
Looking ahead, the main event next week will be the ISM non-manufacturing survey due to be released on Monday. This is one of the most important leading economic indicators for the U.S. economy, and forecasts point to significant growth in January. If so, markets may continue to unwind some bets on a rate cut by the Fed, helping the dollar regain some momentum.
The following are the key points that the market will focus on in the new week (all in Beijing time):
Central Bank News: Fed officials take action one after another, do gold bulls still need to remain patient?
At 8:00 on Monday, the interview with Federal Reserve Chairman Powell on "60 Minutes" will be broadcast;
At 11:30 on Tuesday, the Reserve Bank of Australia will announce its interest rate decision and monetary policy statement;
At 12:30 on Tuesday, the Chairman of the Reserve Bank of Australia, Bullock, held a monetary policy press conference;
At 1:00 on Wednesday, 2024 FOMC voting member and Cleveland Fed President Mester will speak on the economic outlook;
At 2:00 on Wednesday, Minneapolis Fed President Kashkari will speak;
At 2:00 on Wednesday, Bank of Canada Governor Macklem will deliver a speech;
At 3:00 on Wednesday, Boston Fed President Collins will open the conference on the labor market;
At 8:00 a.m. on Wednesday, Philadelphia Fed President Harker will deliver a speech on the Fed’s role in the economy.
At 0:00 on Thursday, Federal Reserve Board Governor Kugler delivered a speech;
At 0:30 on Thursday, Boston Fed President Collins delivered a speech at the Boston Economic Club;
At 1:30 on Thursday, Barkin, 2024 FOMC voting member and Richmond Fed President, will deliver a speech;
At 1:25 on Friday, Barkin, 2024 FOMC voting member and Richmond Fed President, delivered a speech;
At 6:30 a.m. on Friday, Reserve Bank of Australia Governor Bullock will attend a congressional hearing.
On Thursday, the Fed kept its benchmark federal funds rate in a range of 5.25% to 5.5%. At the same time, the Fed signaled that the shift in its outlook should not mean an imminent rate cut. "The Committee believes that it would not be appropriate to lower the target range until it has greater confidence that inflation is moving sustainably toward 2%," the statement said.
In December, most officials projected they could cut rates three times this year if inflation continued to fall gradually and economic growth was steady but unspectacular.
The most "explosive" thing was the denial of the expectation of a rate cut in March by Federal Reserve Chairman Powell. At the press conference, Powell reiterated that the probability of starting a rate cut in March was low, pouring cold water on the previously high market expectations.
According to Powell, none of the 12 FOMC members have suggested starting a rate cut now. Powell said:
“The Fed doesn’t want inflation to be below 2%, and based on today’s meeting, I think a rate cut in March is unlikely. A rate cut in March is not the base case, and it remains to be seen, but I don’t think we will have enough confidence.”
Federal Reserve Chairman Goolsbee said on Friday that there are still "weeks and months" of U.S. economic data to help decide when to cut interest rates, and the Fed will allow inflation to return to its 2% target but will not seek to restore prices to the level before inflation took off.
Goolsbee believes that if the Fed wants to get the price level back to the level of a few years ago, it really has to slow down economic growth to do that, so "rate cuts are not on our radar." Goolsbee believes that only more and more progress, such as in inflation and employment, can make them feel at ease about achieving their goals.
Next week, many Federal Reserve officials will be in full swing. It is predicted that they will continue to hit the market's expectations for the Fed's first rate cut in March. In addition, it cannot be ruled out that they will suppress the market's bets on the extent of the Fed's interest rate cuts.
Powell will appear on CBS's "60 Minutes" at 8 a.m. Beijing time on Monday. Considering that CBS has revealed that Powell will talk about the topic of interest rate cuts, if he again suppresses market expectations for the Fed's interest rate cuts, it may trigger another correction in market pricing.
"I think we can officially say goodbye to the March rate cut and most likely a May rate cut," said Alex McGrath, an adviser at North End's private wealth team.
Jason Pride, chief investment officer at Glenmede, said, "It now looks increasingly unlikely that the Fed will cut interest rates in March, and the more likely trajectory for this year is to start around the summer with only two or three rate cuts."
Gold prices are now fluctuating with the Fed's expectations of rate cuts, and economists at ANZ Bank believe that market expectations that the Fed will cut rates earlier are waning, which has created short-term resistance for gold prices. As geopolitical risks abate, the reduction in safe-haven buying could amplify this effect.
But they also stressed that despite this, the bank still holds a positive view on gold this year. As monetary policy shifts from tight to loose in the second half of the year, geopolitical risks rise, and strong central bank purchases should bode well for gold investment demand. As asset allocations to the sector remain low, investor demand is likely to be strong. This also limits the possibility of large-scale liquidation in the short term.
Deutsche Bank also believes that gold prices will only resume their upward trend in the second half of this year. The bank said in its report:
"We don't see much more upside potential for gold at the moment. After all, Fed Chairman Powell said in a press conference after the Fed meeting that the first rate cut by the Fed may still have to wait for a while. He believes that a rate cut as early as March is unlikely. The Fed first wants to ensure that inflation can return to its target level on a sustained basis. Weak economic data alone may not be enough. Investors in the gold market will have to continue to be patient. Against this backdrop, we insist that gold prices will initially continue to move sideways before resuming their upward trend in the second half of this year."
As for other central banks, the Reserve Bank of Australia will announce its interest rate decision on Tuesday. Market pricing suggests that interest rates will remain unchanged, so the focus will mainly be on whether the central bank will continue to raise interest rates further.
Minutes from the December meeting showed policymakers discussed raising rates again but decided not to. Data has been weaker since then, with inflation slowing sharply in the fourth quarter, a labor market that lost jobs and disappointing consumer spending over the holiday season.
While policymakers may keep the option of raising rates again open, it is becoming increasingly clear that this is unlikely to happen as the domestic economy is losing momentum. So even though the Australian dollar may rise as the RBA maintains its tightening bias, the overall outlook appears bleak.
Important data: The US economy may not be able to "shut down"! Is the US dollar expected to gain momentum again?
Monday 09:45, China’s Caixin Services PMI for January;
At 16:50 on Monday, the final value of France’s January PMI will be released;
At 16:55 on Monday, the final value of Germany’s January PMI;
At 17:00 on Monday, the final value of the Eurozone PMI for January;
At 17:30 on Monday, the UK PMI for January and the Eurozone Sentix Investor Confidence Index for February;
At 18:00 on Monday, the Eurozone December PPI monthly rate;
At 22:45 on Monday, the final value of the US Markit Services PMI for January will be released;
At 23:00 on Monday, the US ISM non-manufacturing PMI for January;
At 18:00 on Tuesday, the euro zone’s December retail sales monthly rate;
Tuesday 23:00, US Global Supply Chain Stress Index for January;
At 1:00 on Wednesday, EIA released its monthly short-term energy outlook report;
Wednesday 21:30, US December trade account;
At 23:30 on Wednesday, the U.S. EIA crude oil inventory and strategic petroleum reserve inventory for the week ending February 2;
Thursday 7:50, Japan's December trade account;
At 17:00 on Thursday, the final value of the Eurozone's January manufacturing PMI;
Thursday 09:30, China's January CPI;
At 21:30 on Thursday, the number of initial jobless claims in the United States for the week ending February 3;
At 23:00 on Thursday, the monthly rate of wholesale sales in December in the United States;
At 15:00 on Friday, the final monthly rate of German CPI for January will be released;
Friday 21:30, Canada's January employment figures;
On Friday, an off-the-charts nonfarm payrolls report shocked the market, while other labor market reports released this week all pointed to a cooling.
Nonfarm payrolls surged by 353,000 last month after upward revisions in the previous two months. The unemployment rate remained at 3.7%. Wages accelerated from a month earlier, increasing by the most since March 2022. Swap contracts further reduced the odds that the Fed will cut interest rates as early as March, and traders also priced in lower rate cuts in 2024.
Peter Cardillo, chief market economist at Spartan Capital Securities, said the non-farm data explains why the Fed is reluctant to declare victory over inflation. The revised data for December made this employment report even hotter than the title suggests. Wage growth gives the Fed a reason not to cut interest rates in the near future. The conclusion is that this report is good for the economy, but bad for the Fed.
Next week's key data will be the ISM non-manufacturing PMI survey, one of the most important leading economic indicators for the U.S. economy, due to be released on Monday, with forecasts pointing to significant growth in January. If so, markets may continue to unwind bets on Fed rate cuts, helping the dollar regain some momentum.
As for the U.S. dollar, FXStreet analysis believes that the market's expectation of a soft landing for the U.S. economy may continue to support the dollar. Patrick Locke, a foreign exchange strategist at JPMorgan Chase, also said:
“The signal from the jobs data seems pretty clear that as long as U.S. job demand remains strong and wages remain firm, the dollar will at least continue to hold its ground.”
Locke said the pace of rate cuts expected from the Federal Reserve still "appears aggressive" compared with other central banks, which should also help support the dollar.
Data from the U.S. Commodity Futures Trading Commission (CFTC) for the week ending January 30 released on Friday showed that non-commercial traders, including hedge funds, asset managers and other speculative market participants, continued to be bearish on the dollar but have cut their net short positions in recent weeks.
Important event: Gaza is expected to cease fire! Will oil prices be difficult to rise in the future?
Earlier this week, Qatar sent out positive signals for the Gaza ceasefire negotiations ahead of schedule, which threw the oil market into "chaos".
On the afternoon of February 2, local time, the Palestinian Islamic Resistance Movement (Hamas) issued a statement saying that Hamas Political Bureau leader Ismail Haniyeh and Palestinian Islamic Jihad leader (Jihad) Ziad Nahala held consultations on a ceasefire in the current round of Israeli-Palestinian conflict. Both sides agreed that any negotiations on a ceasefire agreement in Gaza should be based on the following, including the Israeli army ending its military operations and withdrawing from Gaza, lifting the blockade of the Gaza Strip, supporting Gaza's reconstruction, providing living security for the people of Gaza, and completing the personnel exchange agreement between the two sides.
At present, foreign media revealed that internal divisions among Hamas leaders have prevented them from supporting a hostage release agreement that includes a suspension of the conflict in the Gaza Strip. The report said that the mainstream pattern within Hamas has changed, with the organization's leader in Gaza, Yahya Sinwar, supporting a temporary truce, while Hamas leaders outside the Gaza Strip are pushing Israel to make further concessions and achieve a permanent ceasefire.
Sinwar wants a six-week ceasefire so Hamas can regroup and more aid can flow into Gaza, according to officials familiar with the negotiations. Ismail Haniyeh, however, is pushing for a permanent, internationally guaranteed ceasefire and a plan to rebuild the enclave.
As for the future of crude oil, Citi believes that Saudi Arabia's decision to ask Saudi Aramco to reduce production capacity indicates that OPEC+ has little room to increase production in the future. The bank expects that the fundamentals of the oil market will become loose in the medium term, exerting downward pressure on oil prices. HSBC is more pessimistic, pointing out:
“After Saudi Arabia’s decision to cut production, don’t expect other Gulf OPEC producers to follow suit. Our supply and demand model suggests that OPEC does not have enough room to completely remove production cuts and release additional production over the next five years.”
Company earnings: Earnings season remains hot, has the U.S. stock market reached the “danger zone”?
The Q4 earnings season in the US stock market remains hot. Uber, PepsiCo, Toyota Motor, etc. will release their results before the US stock market opens next week; Walt Disney, Paypal, etc. will release their results after the US stock market closes next week. In terms of Hong Kong stocks, Alibaba and SMIC will also announce their results.
Although Powell firmly stated this week that "there will be no interest rate cut in March", the S&P 500 and Dow Jones Industrial Average continued to set new historical highs, and the Nasdaq was only 2% away from its previous high of 16,057 points.
Regarding the current U.S. stock market, Bank of America strategist Michael Hartnet warned that the current market optimism about technology stocks is like the Internet bubble in 1999.
In the fourth quarter of last year, the decline in U.S. Treasury yields pushed up the Nasdaq, but in the past four weeks, this situation has changed, with both Treasury yields and the Nasdaq rising. Hartnet and his team wrote in a report that such fluctuations usually only occur after a recession, such as in 2009 or during the Internet bubble in 1999.
Coincidentally, JPMorgan strategist Khuram Chaudhry also warned this week that the U.S. stock market is now increasingly similar to the Internet bubble period.
Market closure reminder:
The New Zealand Stock Exchange was closed on Tuesday for Waitangi Day.
On Tuesday and Wednesday, the Taiwan Stock Exchange suspended market trading due to the Spring Festival and only handled settlement and delivery business;
On Thursday, the Taiwan Stock Exchange was closed until February 14 due to the Lunar New Year.
On Thursday, Shanghai Futures Exchange, Dalian Commodity Exchange and Zhengzhou Commodity Exchange will not conduct night trading due to the Spring Festival holiday;
On Friday, the Shanghai, Shenzhen and Beijing Stock Exchanges, Shanghai Futures Exchange, Dalian Commodity Exchange, Zhengzhou Commodity Exchange, China Financial Futures Exchange and Guangzhou Futures Exchange will be closed from February 9 to February 18 due to the Spring Festival holiday; Shanghai Financial Futures Exchange will open normally on Friday New Year's Eve, but there will be no night market trading in the evening; Hong Kong Stock Exchange will trade half a day, closing randomly between 12:08 and 12:10, and southbound and northbound trading will be closed. It will open normally on the 14th;
The Seoul Stock Exchange was closed on Friday until February 12 for the Lunar New Year.
The article is forwarded from: Jinshi Data
