This week is expected to be fairly calm. Today, there will be a lack of trading in the US due to Presidents’ Day. In the coming days, we will learn, among other things, the protocol from the last FOMC meeting as well as PMI indexes for industry and services for European countries and for the US economy. On Friday, Wall Street stock indexes noted a downward session, falling from record levels. PPI inflation turned out to be significantly higher than forecasts, which caused the market to again adjust its valuation of the future path of Fed interest rates.
Wall Street is closed today, but China is returning to normal mode after the Lunar New Year holiday. Local reports suggest that travel and spending were high during this period, which may suggest that Chinese consumption is ready to accelerate again. However, stock indices behaved in a mixed way in today’s session. Today, the benchmark CSI 300 gained only 0.6% and the Hang Seng index lost 1.13%.
Friday’s report on producer inflation in the US surprised the markets with its high values. The January reading showed an increase of 0.3% m/m (in December -0.1%) and 0.9% y/y (forecast 0.6%). Excluding food and energy, core PPI rose by 0.5% m/m (consensus 0.1%) versus -0.1% in December. This translated into 2% y/y (consensus 1.6%) versus 1.7% previously. Consumer sentiment according to the University of Michigan report reached 79.6 points, which means an increase from 79 points in December but at the same time a lower value than expected (80 points). Short-term inflation expectations were higher, reaching 3%, while long-term expectations remained at 2.9%. Regarding inflation, markets will now be waiting for the Fed’s preferred measure, the core PCE deflator, which we will learn along with the full report on Americans’ spending on February 29.
As a result of the 2:30 PM data (PPI), the dollar initially strengthened but quickly lost ground when the 4:00 PM (Michigan) data saw the light of day. Currently, it will be crucial for the dollar that inflation remains high and other economic health-related data remain solid. This would reaffirm the Fed’s stance which, in short, can be called “high for longer.” Last Friday, Fed Funds futures contracts were pricing in just a 12% chance of a 25 bp rate cut in March, 39% by May, and just over 62% by June. In 2024, the market expects a reduction of 90 bps in the cost of money in the US, compared to 125 bps in early February and 158 bps at the end of 2023. It is clear how much the initially optimistic scenario had to be revised in light of the macroeconomic data received since that time.
On Friday, various Fed representatives spoke up. Barkin from the Fed Richmond said that the latest inflation data underscore why policymakers want to see more data before lowering interest rates. Bostic from Atlanta said that his perspective is to begin returning rates “to a more neutral position by the summer.” He reiterated expectations for two rate cuts in 2024, but if inflation falls faster than projected, three cuts may occur. Mary Daly indicated that three 25 bps rate cuts this year is a “reasonable base level.”
The EUR/USD rate on Friday found itself in a place where the downtrend line runs, linking the highs from the end of December 2023 and the beginning of February this year. The candlestick pattern on the chart suggests a bounce. The chart showing 4-hour “candles” features an inverted head and shoulders pattern. The decline in the main currency pair, which lasted over 1.5 months, set lows around horizontal support (1.0720) and at a point that is one of the key internal Fibonacci retracements (61.8%).
Łukasz Zembik, Oanda TMS Brokers.
