Following Record Highs 

Equities in Europe were generally a little higher on Monday morning after record highs for Paris, Frankfurt, Sydney and New York last week continued to point to markets being in some kind of Goldilocks sweet spot where the Fed is going to cut heavily into a period of great economic expansion… 

London is still a bit of a laggard for reasons of its own but rose a tentative third of a percent at the open today. Italy’s benchmark FTSE MIB stock index rallied more than 1% after a record year for UniCredit saw its shares rally 8%. China sank further, prompting the securities regulator to promise it would take steps to prevent abnormal market fluctuations. 

Hold Your Horses 

Over the weekend, Fed chair Jay Powell said on CBS that the US central bank would cut three times this year – as per the dots and so added nothing new in reiterating the “danger of moving too soon.” In the Middle East, the US and UK carried out more strikes on Houthi rebels.  

U.S. national security adviser Jake Sullivan said strikes against targets in Iraq and Syria on Friday were “the beginning, not the end” of Washington’s response to a drone attack that killed three American soldiers. Oil is not bothered – crude prices have been smartly lowering the last few sessions, with U.S. oil benchmark WTI down 9% since last Monday’s 2-month high. 

What Did the PMI Indicate? 

Today the Chinese Caixin services PMI hit 52.7, the 14th month of expansion though a little below the forecast. Later it’s the US turn with the ISM services PMI. The previous report showed economic activity in the services sector expanded in December, the 12th consecutive month of growth, albeit the rate of expansion cooled somewhat from the previous month.  

Down Under 

Tomorrow is the RBA. falling inflation helped the Australian equity market hit a record high last week, but what does it mean for the country’s central bank? The Reserve Bank of Australia is expected to hold firm on rates but softer inflation points to policymakers being able to look at cuts later in the year. There were substantial declines in headline and core inflation measures in the fourth quarter, with the headline CPI down to 4.1% vs 4.3% expected and the December print at 3.4% vs 3.7% anticipated. That has left markets betting on the RBA to start cutting rates sooner than they might have done.  

Powell Slashes Noise of March Rate Cut 

Friday saw a monster jobs report and hot wage data. March rate cut off the table, May for that matter... U.S. 10-year Treasury yields were down about a quarter point and on track to close at the lowest since about July before the blowout nonfarm payrolls report saw yields spike higher.  

The 10-year is at 4.0% and the 2-year has risen 10bps to 4.46% this morning. Could it be too big a number? The headline 353,000 is apt to be revised lower, but the December number was revised up to 333,000. There is clearly a strength underlying the data.  

Wages at 4.5% is what Powell is looking at more than anything else — and this was hot. This is not the only wage data on offer, but it will be something the Fed cannot ignore. Off the back of the report, yields firmed up, the dollar caught a bid, gold plunged, and equities turned a bit lower.  

But going back to a recurring theme – everything is bullish for equities right now (strong jobs data points to immaculate disinflation and stronger earnings growth) and the S&P 500 index rallied to a fresh record, rising 1.1% on Friday to almost touch 5,000.  

This is such a noisy picture we are getting lots of conflicting stories about the economy, but for the market, it seems there is little chance the Fed can cut into this kind of labour market. Right now, then, we are looking at the first cut taking place in the summer – markets are comfortably riding this uncertainty because they know the next move is down.  

Dollar strength pushed the GBP to USD pair (widely known as “cable” in forex markets) below its 50-day SMA on Friday and sterling is extending losses this morning to test the 1.260 level. 

Likewise, the euro fell and is apt to test the long-term trend before long.