China Sheepish Against Rising Sentiment 

Caution seemed the order of the day across markets early on Monday as China set itself one of the lowest gross domestic product targets in many years, hinting to investors that the big reopening boom may not be as positive for the global economy as hoped. Beijing set a target of around 5% growth this year, creating a relatively low bar for the regime to clear. Oil and other industrial commodities slipped on the news, whilst basic resources stocks in London were hit, dragging the FTSE 100 marginally into the red at the open.  

Bonds Retreat as Europe Holds 

Stocks in Europe were mainly higher in early trade though after Wall Street posted its best session in over a month, ending a three-week losing streak as Treasury yields retreated sharply. The US 10yr benchmark declined to below 3.95%, having had a flirt with 4.10% earlier in the week. It’s a simple case of yields declining = stock market goes up. The tech heavy Nasdaq added almost 2% on Friday, whilst the S&P 500 rallied clear of 4,000 and its 50-day moving average.  

Fed Comments Coming 

Fed chair Jay Powell testifies before Congress on Tuesday and Wednesday, providing ample headline risk potential as market participants try to decipher what the central bank does next. Remember the Fed has, in its eyes, caught up and is now fully data dependent. Powell though has a choice in the words and tone – does he push back against the bond market’s higher for longer acceptance, or signal a slightly more dovish potential should the data improve? My view is that he will setting out the case for pushing rates higher and signalling that the median terminal rate dot plot will move up in a couple of weeks’ time. San Francisco Fed president Mary Daly says rates will be higher for longer.  

NeverEnding Story: Banks Vs Inflation  

The Reserve Bank of Australia faces a little less pressure to hike rates aggressively after the country’s annual inflation rate eased in January. This follows a reacceleration in the final quarter of 2022 to a 33-year high. The consumer price index for the month was 7.4%, compared with 8.4% for December. In spite of this the RBA seems likely to go ahead with a further 25bps hike, taking the cash rate to 3.6%. There is a risk for the AUD that the RBA dials down its hawkish talk and signals a pause.  

Three weeks ago, Bank of Canada Governor Tiff Macklem said no further interest rate rises would be needed if the economy stagnated and inflation falls. Q4 data out last week showed a surprise flat line, backing up the decision to signal a pause. Nevertheless, inflationary pressures, not least those coming from the US which are forcing up the US dollar against the CAD, mean rate hikes remain on the table.   

What’s Next? 

China’s PPI and CPI inflation indices will a major focus after a mixed set of numbers in January. CPI ticked up to 2.1% from 1.8% in December, whilst the monthly rate jumped to +0.8% from 0% in the prior month. PPI, on the other hand, declined 0.8% in January. Additionally, traders will also pay attention to the weekly unemployment claims figures from the US.  

All eyes will be on the US labour market report as the Fed has switched into a newly data-dependent mode. Stocks have been under pressure and bond yields higher. This comes after January nonfarm payrolls blew well beyond previous forecasts, pointing to a more resilient labour market that won’t be shouting at the Fed to pause hikes. Nonfarm Payrolls rose by 517,000 in January, average hourly earnings rose 4.4%, compared to analysts' estimate of 4.9%, whilst the unemployment rate dropped to 3.4%. Ahead of the Friday report, JOLTS job openings and the ADP employment report will be eyed for the state of the US labour market ahead of the nonfarm payrolls.