There is a full calendar of central bank meetings this week as the Federal Reserve, European Central Bank and Bank of England hold their first monetary policy meetings of the year. We expect that the Fed will hike rates by 25bps on February 1, taking the upper bound of the Fed funds rate to 4.75%. Market expectation has a near certainty that the Fed will make use of a quarter point hike, a slowdown from the 50bps hike in December and 75bps moves used several times in 2022. Fed speakers have been lining up for the downshift in the tightening of monetary policy but focus will fall on Fed chair Jerome Powell and how hawkish his commentary is following the decision. Powell may indicate that while the economy is now in a position to absorb smaller degrees of tightening monetary policy, rates still need to be moving higher and potentially be held at high levels for longer.
One of the factors supporting a slowing pace of tightening has been easing price pressures. The PCE deflator, the inflation data that the Fed actually targets, slowed to 5% y/y in December, its slowest pace for all of 2022 and mildest price growth since September 2021. The core PCE deflator dropped to 4.4%, down from 4.7% a month earlier. Services inflation remains the driving force now as goods’ prices are slowing along with a decline in demand. Real personal consumption dropped by 0.3% m/m in December 2022, setting up for a soft start to this year.
For the ECB and Bank of England, the inflation pressures remain acute and policymakers, particularly at the ECB, have been vocally hawkish in recent commentary. We expect both will hike by 50bps at their meetings on February 2 this week.
Today’s Economic Data and Events
- 13:00 GE GDP Q4 y/y: forecast 0.8%
- 19:30 US Dallas Fed manf. Survey January: forecast -15.
Fixed Income
- US Treasuries recorded fairly choppy trading week with round trip moves ultimately ending the week with a modest higher bias. We would expect more choppy trading in the week leading up to the Fed. Yields on the 2yr UST added 3bps last week to 4.199% while the 10yr yield was up closer to 2bps at 3.5035%. A stridently hawkish Fed could open up some more downside risks for Treasuries though markets may fixate on the face the Fed is slowing down its pace of hikes.
- Bond markets in Europe were mixed last week with bund yields edging higher with the 10yr yield up 7bps at 2.237%. Similar to the Fed, action may be choppy in the run up to a potentially ever more hawkish ECB toward the end of the week. Gilts managed to be the standout that rallied with 10yr yields down 5bps.
- Emerging market and high-yield bonds seemed to catch a risk on bid, similar to the tone in equities last week. A broad index of high-yield bonds added 0.4% last week while an index of USD-denominated emerging market bonds added 0.3% last week, both of them gaining four weeks in a row.
FX
- The dollar extended its losses against most peers last week with the DXY index down, albeit marginally, for a third week in a row. EURUSD added 0.1% to 1.0868 though did turn lower at the end of the week. USDJPY moved higher as a risk on move meant limited appeal for havens while GBPUSD fell by 0.1% last week to 1.2382.
- Commodity currencies had a more buoyant week with AUDUSD the standout, rising by almost 2% last week to 0.71. USDCAD moved in favour of the loonie, down by 0.5% to 1.3311 even as the Bank of Canada front ran the Fed in downshifting the pace of tightening while NZDUSD added 0.3% to 0.6493.
Equities
- Global equity markets continued their strong 2023 rebound last week, with most key indices closing higher. Mainland China’s markets remained closed on Friday, but the Hang Seng returned from the Lunar New Year holiday to close the week up 5.2%, while Japan’s Nikkei added 2.2%. By contrast, Indian equities were under pressure after their outperformance in 2022 – the Sensex lost 2.5% w/w, and is down by the same degree ytd.
- In the US, the S&P 500 was comfortably above the 4,000 level all week, and closed up 2.5% w/w on Friday. The Dow Jones added 1.8% w/w while the NASDAQ was the key gainer as it added 4.3%. In Europe, the FTSE 100 lost 0.1% w/w but the DAX (0.8%) and the CAC (1.5%) both closed the week higher.
- Locally, the DFM ended down 0.7% w/w while the ADX lost 4.4%. Saudi Arabia’s Tadawul closed up 1.3% while Egypt’s EGX 30 added 5.0%.
Commodities
- Oil prices stumbled at the end of the week and recorded a weekly loss of 1.1% in Brent, finishing at USD 86.66/b and WTI closing back below USD 80/b with a loss of 2% last week. The near term focus for oil markets will be how the EU chooses to implement in embargo on seaborne Russia refined products and at what level they may impose a price cap, similar to the one in use in the crude oil market.
- OPEC+ ministers will meet for the joint ministerial monitoring committee to evaluate oil market conditions. Given the improvement in oil prices in the last few weeks overall, the committee may recommend to keep output targets unchanged.