Week of Jan 8

The shortened trading week allowed important data releases, including the minutes from the FOMC, employment figures, and flash Eurozone CPI data. The following week promises a more relaxed schedule, releasing various trade balance reports and final US inflation numbers for December.

Top Events in Review

Returning from an extended weekend, traders encountered significant data releases and market declines as major US indices retreated from near-record highs over the week. 

The FOMC minutes were the week's highlight, conveying a more hawkish tone than anticipated and dismissing speculation of a March interest rate cut. JOLTs anticipated the Non-Farm payrolls report, showing ongoing declines in new hiring, with job growth slightly lower month-on-month. Private payrolls had the highest print in months according to the ADP, while Initial jobless claims fell in the holiday period. On the PMI front, US manufacturing prices significantly exceeded expectations, raising hopes that inflationary pressures continue to recede. 

Meanwhile, geopolitics contributed to risk aversion as tensions in the Middle East escalated following an Iranian warship's entry into the Red Sea. In addition, first-quarter corporate earnings reports added to the negative sentiment, including Walgreens Boots Alliance cutting its dividend for the first time in decades. 

In the euro area, year-on-year inflation came in at 2.9%, higher than 2.4% prior but lower than expectations of 3%. Core fell from 3.6% prior to 3.4% but aligned with forecasts. According to Eurostat, annual inflation is expected to be 2.9% in December 2023, up from 2.4% in November. 

Biggest Market Movers

• The Nasdaq Composite saw its worst first-week performance since 2000, falling over 3%
• Oil prices were volatile due to tensions in the Middle East and production stoppages in Libya resulting from protests versus EIA's large crude inventory.
• The 10-year US Treasury yield tested 4% for the first time since mid-December, sending USDJPY above 145 some 3% higher.
• EURUSD dropped over 1% to $1.09, with the DXY rising from 101 to over 102.

Top Events in the Week Ahead

The economic calendar promises less activity next week, with a highlight of Thursday's release of US CPI data for December. With the Fed emphasising a data-dependent stance, employment and inflation reports carry outsized importance. 

US CPI Likely to Impact Rate Cut Chances

Headline inflation is estimated to have declined slightly to 3% from 3.1% prior. However, core inflation is forecast to remain unchanged at 4%. Producer price data is projected to show a similar trend, with the monthly rate at 0.1% versus 0% previously and core annual inflation steady at 2%. Gold could head towards the $2K handle or $2100 an ounce, depending on divergence versus expectations.

UK GDP in Focus Following November Slump

For the pound, monthly UK GDP data on Friday is a key release, with expectations of a return to 0.1% growth in November from -0.3% during the last period. Manufacturing production is also projected to accelerate back to 0.3% growth compared to -0.8%. If cable maintains a firm position above 1.26, it could reach 1.28. Otherwise, the risk of sliding to 1.2510 will increase.

Trade Balances to Show Slowing Dynamism

Regularly scheduled trade balance reports throughout the week are anticipated to demonstrate a pattern of slowing trade flows, given tensions in the Red Sea region. However, this could also raise concerns for future economic expansion. WTI could see increased volatility if tensions continue to escalate, exposing $75 a barrel on the one hand and $70 on the other.

Germany's trade surplus is estimated to narrow marginally on negative import and export growth. Canada's balance may prove the exception, potentially boosted by higher crude prices supporting exports. Loonie has the next resistance at 1.3443. The US deficit is projected to widen to $64.8 billion from $64.3 billion on diminishing trade in both directions. Australia's surplus is estimated to rise mainly from falling imports, with Aussie eying 0.6560 under the 66-cent barrier unless bulls reclaim 0.67. The UK deficit is also seen contracting. On Saturday, China's exports are projected to accelerate slightly to 0.9% growth versus 0.5%, expanding its monthly December trade surplus.

Other events, earnings

Monday will include Swiss inflation and Eurozone consumer confidence data. German industrial production is scheduled for Tuesday. Australia reports inflation on Wednesday. Friday brings Chinese inflation and the BOJ's Tankan survey. 

The light corporate earnings calendar builds ahead of major banks' Friday reports, with key names reporting, including UnitedHealth Group, JPMorgan Chase, Bank of America, Wells Fargo, Delta Air Lines, Infosys, and Albertsons.​