Week of Jan 29

The US saw its economy growing faster than expected, with the BOJ and ECB keeping policy unchanged. This week sees a continuation of the busy economic events calendar, with high-profile interest rate decisions and important data releases.

The Week in Review

The preliminary report of US GDP of the previous week far exceeded all forecasts, coming in at 3.3% compared to the average expectation of 2%. Personal consumption was among the key drivers, with the price index rising at its slowest pace since the middle of the pandemic. The data signalled the potential for the Fed to ease monetary policy due to slowing inflation against a backdrop of continued economic expansion. However, other recent economic indicators pointed to weakness, such as the largest rise in jobless claims seen since June and durable goods orders remaining flat. The US index had a volatile week but failed to get through the 200 WMA at 103.50, exposing support at 102.35.

As anticipated by markets, the ECB maintained the status quo. President Christine Lagarde insisted it was too soon to discuss interest rate cuts and reiterated the bank would remain data-dependent. In reaction to the decision and accompanying commentary, expectations increased that the ECB will first cut in June. EURUSD slid to a fresh low at 1.081 for the year, opening the door to 1.07 next unless bulls reclaim and uphold 1.0932.

The BOJ also left monetary policy unchanged and did not change its yield curve control framework, but Kazuo Ueda, the bank's Governor, was more hawkish than what markets anticipated. However, forward guidance on CPI and GDP growth did not alter prevailing forecasts. A sudden drop in Tokyo inflation later in the week supported speculation that the BOJ  may delay hiking interest rates further. USDJPY maintained a bullish footing above 146.70, with lower support at 145.68 and resistance above 148.80 at 150.

Asian markets were buoyed throughout the week, firstly in anticipation of and then following PBOC cutting its required reserve ratio (RRR) by 50 basis points, a move that positively surprised markets with more easing than forecast. Rumours persisted that the Chinese government could implement a market support package.

Geopolitically, the US and UK continued airstrikes against Houthi rebels in Yemen, who uphold attempts to target shipping in the Red Sea, with reports that the Biden Administration was drafting plans for a "sustained" military campaign in the region. Additionally, the Turkish and Hungarian parliaments approved Sweden joining NATO.

Biggest Market Movers

S&P 500 hit a new record high after rising over 1% following earnings reports that beat expectations overall.

WTI spiked over 5%, buoyed by cold weather and better US economic growth

Gold fell for the second consecutive week on a firmer dollar but was seen flat on a relative perspective.

FTSE 100 drifted lower on Monday but ended the week 2% higher from the low after UK consumer confidence hit a two-year high.

Top Event in the Week Ahead

Focus on NFP and BOE

The FOMC meets on Wednesday, where policy is unanimously expected to remain unchanged following their two-day meeting. However, the key highlight of the week is likely to be the release of the Non-farm payroll (NFP) figures on Friday.

With inflation showing signs of moderation and ongoing economic growth, analysts will scrutinise labour market data for indications of when the Fed may adjust its tightening stance to support its secondary objective of maximum employment. The unemployment rate is forecast to tick marginally higher to 3.8%. Payrolls are projected to decline to 162K after exceeding expectations in December, though wage inflation will remain a focus. Evidence of easing pressures in the jobs market could help to temper inflation and provide a rationale for the Fed to cut interest rates sooner or more significantly than projected.

Also meeting this week is the BOE on Thursday, where no policy adjustment is anticipated. Nevertheless, the market will parse commentary for clues that the bias may be shifting towards monetary easing at Threadneedle Street, reflective of pricing suggesting a rate cut as early as May. Cable held the 1.27 support firmly, but without control of 1.28, the risk of reverting back to 1.26 remains high.

Alignment Between the Eurozone Economy and Inflation

The Eurozone is scheduled to report its preliminary GDP figures for the fourth quarter, with France expected to provide early indications. French GDP is forecast to improve to 0% from -0.1% quarter-on-quarter. However, this may not prevent the Eurozone from repeating its -0.1% quarterly growth rate, technically placing it in recession. Germany will publish its GDP the following day, which is also predicted to improve to -0.2% from -0.4% prior. As with French CPI, Germany's headline inflation is expected to decline slightly. The Eurozone inflation rate is projected to retreat to 2.2% from the prior recording of 2.9% despite higher costs stemming from the crisis in the Red Sea.

Economies' Directional Signals from PMIs

On Wednesday, China will release its official manufacturing and non-manufacturing PMIs for January. While manufacturing is expected to remain in contraction, the private Caixin index is forecast to stay in expansion. Australia is projected to validate its return to expansion, with the Eurozone's preliminary PMIs anticipated to reiterate improved yet still contracting readings. The US ISM manufacturing PMI is expected to remain in contraction but exhibit a modest increase.

Other Events and Earnings

Monday will see New Zealand's trade balance data. UK mortgage approvals and US consumer confidence are scheduled for Tuesday. Wednesday has Japan's retail sales, the BOJ's meeting minutes, and Australian quarterly inflation. Swiss consumer confidence and US inflation expectations from the University of Michigan are pencilled in for Friday.

Around half of S&P 500 constituents are anticipated to have reported earnings by week's end, with major releases expected from RyanAir, Microsoft, Alphabet, AMD, Novo Nordisk, Boeing, Apple, Amazon, Meta, Exxon Mobil, Abbvie and Chevron.