The Week Ahead

A volatile week across asset classes saw the yield on the 10-year UST yield hit highs of ~4.20%, eventually closing the week up 18bps, at 4.12%. Heightened geopolitics, concerns over global growth, mixed US data, and central bank rhetoric, thus rate projection repricing were the primary drivers of sentiment through the week. The S&P Index rallied to its all-time high, closing 4.42% higher on the week. Meanwhile, the dollar surged earlier in the week, leading to a gain of 0.86% for the DXY Index. Oil traders grappled with rising conflict in the Red Sea, surplus supply, and the global demand backdrop; Brent was 0.34% higher at $78.56pb.  

US data readings included the empire manufacturing print, which plummeted to -43.7, versus expectations for -5. Consumption, on the other hand, remains robust, as US retail sales once again surprised to the upside. The Fed’s favoured control group reading stood out, up 0.8% (exp. 0.5%. Prev. 0.5%). The housing market also broadly appeared stronger than market expectations. Amid this data and the December inflation figures, Fed rhetoric implied market pricing for a March cut could be premature. Bostic cautioned against cutting rates too quickly, given the uncertain geopolitical backdrop and its potential effects on inflation and the economy. Furthermore, Waller argued for more patience and certainty before cutting rates, rather than rushing into rate cuts too early. His comments saw an immediate pull back on March rate cut pricing, which after the robust Uni. of Michigan sentiment, expectations and conditions were cut to below 50%. Markets are now pricing the first cut in May. The Fed’s Beige Book reinforced the strength of the consumer, which helped buoy growth, offsetting weaknesses in other sectors, for example, manufacturing. Broadly, “most districts indicated that expectations of their firms for future growth were positive, had improved, or both”. 

Elsewhere, EU inflation fell-in line with expectations, rising 2.9% in December, from 2.4% in November. ECB President Christine Lagarde indicated the central bank will likely cut interest rates in the summer. She expressed confidence they are on the “right path” in addressing inflation, adding that it is the central bank’s role to say what may happen. Over the week, ECB officials also pushed back on aggressive rate cuts bets. Holzmann said markets should not expect rate cuts this year. Nagel later echoed Lagarde, saying the easing cycle could wait for the summer break.  

Closer to home, UK inflation unexpectedly accelerated in December, to 4%, from 3.9%, complicating the outlook on interest rates. On Friday we heard that UK retail sales fell at their fastest pace since January 2021, sales dropped 3.2% in December, well below the expected 0.5%, adding to the risks the economy slid into a shallow recession. Property sector weakness remained a major drag, as home prices fell the most in nearly a decade in December. Both new and resale home markets declined.  

Over in China, we saw another mixed picture; growth exceeded the government’s “around 5%” target, at 5.3%, but came in below expectations for 5.3% expansion. Still a notable rebound from the 3% growth achieved in 2022. The property sector weakness remained a major drag, as home prices fell the most in nearly a decade in December. Retail sales figures also missed expectations. On the brighter side, industrial production and fixed asset investment beat forecasts for the full year. Moreover, in a move to bolster transparency, the statistics bureau resumed reporting youth unemployment data, showing a jobless rate of 14.9% for 16-24 year olds in December. This excludes students and is down from 21.3% in June. The data indicates China's economy rebounded partially from its pandemic lows but still faces structural drags like the ailing property sector. China has once again set an ambitious 5% growth target for 2024, indicating a pro-growth stance, particularly given economic expansion will be measured against a higher base. Earlier in the week we heard that China’s USD1.24tn sovereign wealth Fund vowed to help with risk mitigation and market stabilisation in 2024, the latest sign of state companies playing a bigger role in bolstering the ailing stock market. This morning, as expected, China’s 1- and 5-year prime rates fixings were left at 3.45% and 4.20%, respectively.  

In what is a fairly thin week for data and FOMC blackout, we expect market volatility to remain amid geopolitical friction, and key rate signals, including US GDP (Thursday), and the Fed’s favoured PCE inflation prints (Friday). We also have the ECB rate decision (Thursday), expect no change, USD 162bn in Treasury issues (2-, 5-, and 7-year tranches), and a bout of US corporate earnings reports. On Tuesday we have the BoJ rate decision, and the ECB’s bank lending survey. S&P Global PMIs for the eurozone, Germany, France, UK and US will be watched closely on Wednesday. Lagarde’s comments will garner much interest post the ECB meeting on Thursday, and later we have the advance Q4’23 US GDP growth figure on Thursday; it will show growth slowing markedly from the previous quarter, current estimates are at 2%yoy. We also have the CFNAI print and personal consumption release, which is expected to ease in the final quarter of 2023.