The Week Ahead

Markets witnessed a rollercoaster week amid the FOMC meeting, concerns over US regional banks, broadly resilient Magnificent 7 earnings reports, and finally, the bumper US employment report. The yield on the 10-year UST closed 12bps lower at 4.02%, and the S&P Index gained 1.38% last week, closing at a new all-time high. The dollar enjoyed the non-farm payroll beat, the DXY Index rose 0.47%. Oil traders largely ignored any geopolitical fictions and focused instead on high interest rates, Brent fell 7.44%, closing at $77.33pb.    

The echo from last year’s US regional bank crisis came through last week, as New York Community Bancorp (NYCB) posted poor quarterly earnings with large loan losses tied partly to struggles in commercial real estate, sparking a steep drop in its share price and raising concerns about a potential vulnerability in the otherwise strong US economy. Then, as expected, for the fourth straight meeting, the Fed held rates, in a unanimous decision. The accompanying statement said the risks to goals “are moving into better balance”. Powell and the FOMC also signalled they are not ready to cut rates until they have more confidence that “inflation is moving sustainably towards 2%”. FOMC revisions included projections for rates by the end of the year, up to 5.1%, from 4.6% in June. Powell noted that "implicitly, we do have confidence, and it has been increasing, but we want to get greater confidence…we're looking for a continuation of the good data that we've been seeing.” Essentially, the Fed is not looking to move to cut this quarter.     

This was further underscored by the massive beat on the employment report which saw non-farm payrolls jump +353k in January (exp. 185k), coupled with an upward revision to the December reading, +333k (from 216k). Unemployment remained at 3.7% (exp. 3.8%) and average hourly earnings also surprised to the upside at 0.6%mom (exp. 0.3%) and 4.5%yoy (exp. 4.1%). Given the strong data through the week, which included the US consumer confidence index, which jumped to its highest level since 2021, we believe the Fed may have to stay at peak rates for longer than the markets expect. Futures pricing for a March cut closed the week at 22%, and 69% in May. Over the weekend Fed Chair Powell said the “danger of moving too soon is that the job’s not quite done”. Therefore, the chances of cuts in March and June have been repriced to 18% and 57%, respectively, at the time of writing.    

Closer to home, the BoE followed the Fed's decision by keeping interest rates unchanged, while also mirroring expectations for no imminent rate cuts or hikes - six MPC members voted to hold, two wanted a 25bp increase, and dovish member Swati Dhingra unusually called for a cut. Though noting inflation has fallen sharply recently, BoE Governor Andrew Bailey said more evidence is still needed that inflation will sustainably hit the 2% target before considering lowering rates.  

In China, January data showed a modest rebound in manufacturing PMI, indicating stabilisation in the sector. To further support the economy, China continues accelerating stimulus, including CNY 150bn in new lending for property developers, with additional unspent bond funds from 2023 providing cushion for more proactive fiscal policy. Local 2024 growth targets average slightly above 5.4%, cautious but practical, suggesting China will likely set its national growth target at around 5% for this year, due to be announced in March.     

Also, last week, the IMF hiked its global growth forecast to 3.1% for 2024, up from October’s estimate of 2.9% and kept its 2025 forecast unchanged at 3.2%. So, higher than the World Bank’s 2.4% estimate for 2024 growth. The IMF upgraded its forecast for the US and China to 2.1% (from 1.5%) and 4.6% (from 4.2%), respectively.    

In contrast, the IMF’s forecasts for the eurozone were cut to just 0.9% growth in 2024 and 1.7% in 2025 - lagging the global pace - with powerhouse Germany now seen expanding only 0.5% amid recent contraction. Despite the Bundesbank governor striking a newly dovish tone in declaring inflation tamed, weaker European outlooks, including an imminent German recession, have ECB policymakers focused on more aggressive easing compared to the Fed as the area lags the global recovery.    

The eurozone S&P Global PMI and PPI print will be of interest later today, as will the OECD interim economic outlook report to the global economy. Eurozone retail sales and Germany’s factory orders are due on Tuesday. US trade data follows on Wednesday. China’s CPI and PPI will garner market attention on Thursday morning, and later we have US inventories and initial jobless claims. Janet Yellen will speak at the Senate banking committee hearing on the Financial Stability Oversight Council annual report. China’s Lunar New Year’s Eve celebrations commence on Friday.    

There’s plenty of central bank chatter to digest throughout the week. We’ll hear from the Fed’s: Bostic (Monday); Mester on economic outlook, and Harker on Fed’s role in economy (Tuesday); Kugler on US economy and monetary policy, and Barkin speaks on regional economy (Wednesday). This week's corporate earnings will also garner much interest, including UBS (Tuesday) and Walt Disney (Wednesday).