The Week Ahead

A fairly bullish week amid broadly robust data from the US saw the S&P Index rally to new highs, closing the week up 1.06%. Meanwhile, the yield on the 10- year UST was marginally unchanged, closing at 4.14%, the dollar (DXY Index) gained 0.14%, and oil enjoyed a 6.35% rally, to $83.55pb.  

The US S&P Global prelim. manufacturing PMI jumped into expansion in January; the first time the manufacturing sector expanded since October. The prelim. services PMI also accelerated above expectations for the 12th consecutive time. Next, we had the advance 4Q23 estimates which showed that the US economy expanded 3.3%qoq (exp. 2%, 3Q: 4.9%), and personal consumption remained robust. The GDP price index missed expectations, at +1.5%qoq (est. 2.2%, 3Q: 3.3%), and the core PCE price index steadied at 2.0%qoq. There was a further mixed picture on Friday, which showed personal income easing in December, while personal spending surprised to the upside. The Fed’s preferred inflation gauge cooled to a near three-year low, despite the robust spending through the holiday period; the PCE Core deflator increased 2.9% last month (exp. 3.0%, prev. 3.2%). Futures markets closed the week pricing in a less than 50% chance of a cut in March; however, at time of writing, that has edged up to 51.3%. 

Elsewhere, the PBoC on Wednesday surprised markets with a larger-than-expected RRR cut, of 50bps, effective on 5th February, which will release CNY1tn of long-term liquidity to the market. The cut which has normally been disclosed by the state agencies was instead announced personally by the central bank’s Governor Pan Gongsheng, signalling the willingness for policymakers to boost confidence. China appears to be pivoting to focus more on addressing economic weaknesses and deflation risks rather than curbing debt and financial risks. Moreover, specific regulatory actions over the weekend included suspending lending of restricted shares, adjusting securities lending disclosure rules to enhance transparency and prevent disguised share sales. Over the weekend we had China’s industrial profits print, which fell 2.3% last year.  

The ECB stayed pat on rates, no surprises there. The central bank’s President, Lagarde pushed back against “premature” market expectations for an April cut, despite saying that the “disinflation process is at work”. Lagarde added that inflation in December was “weaker than expected” adding that price pressures will “ease further over the course of the year”. Given the strong wage growth and lower productivity backdrop “keeping price pressures high”, Lagarde noted that there have been signs of a marginal decline in wage growth, which is “directionally good from our perspective”. The latest Euro area bank lending survey shows that while banks have tightened credit standards, the impact on the real economy has not been as severe as feared. The survey points to early signs of adaptation in bank credit flows, as banks foresee a recovery in loan demand aligned with expectations of future rate cuts by the ECB. 

An exciting week ahead includes the FOMC decision and Powell presser (Wednesday), the BoE rate meeting (Thursday) and the US employment report (Friday). Corporate results include Apple, Microsoft, Amazon and Alphabet. On Tuesday we have Eurozone GDP and confidence, and US Conf. Board consumer confidence prints. China’s PMI’s hit the screens on Wednesday, and we have the US Treasury quarterly refunding report. The S&P Global PMIs for the eurozone, and UK could be of interest on Thursday, later the US productivity, construction spending, ISM manufacturing and initial jobless claims releases will be watched closely. The Uni. of Michigan consumer sentiment and factory order prints are due on Friday, along with the non-farm payroll figure (exp. +180k), and unemployment print (exp. 3.8%).