Lots to Unpack this Week 

The EU is threatening to hurt Hungary’s jobs and growth to try force its hand over Ukraine aid. The level of discord between Brussels and a member state is beyond anything I can recall. Put your politics and assumptions aside for a moment – the EU is finding it harder to work, harder to get stuff done, and elections this summer, which will see a huge surge for the right, will only further reveal the growing disharmony. It’s a mega week for data and earnings too – nonfarm payrolls on Friday and before that we have two major central bank decisions, inflation data from the Eurozone and a fifth of the S&P 500 are due to report. 

Markets - Bated Breath 

European stocks had a familiar lack of direction early Monday ahead of a big week for central bank action with the Fed and Bank of England meeting. Chinese shares led Asian lower as embattled property developer Evergrande was ordered to wind up, the shares halted after declining 21%. Still the world keeps turning. BofA noted Friday: record $12.1bn inflows to EM equities ($11.9bn to China) on PBOC easing after China stocks hit Oct'08 GFC lows & exodus of foreign investors; “epic deflation of property stocks ... makes China the world’s most enticing contrarian long ‘trade’.”  

Inflation Cooling, Oil Spikes 

The FTSE 100 had a big bump higher on Friday, rallying 1.4% as US inflation cooled. It’s seeing limited progress this morning despite oil prices hitting their highest since the end of November. The Fed’s preferred measure of inflation fell to 2.9 per cent in December from 3.2% in November – the first time it’s been under 3% since March 2021. Wall St ended a 6-day rally on Friday, ending down a fraction. Tesla slumped almost 14% for the week but tech was generally leading the pack higher over the course of the week. Oil prices jumped to the highest in two months after three US servicemen were killed in Jordan by Iran’s proxies, clearly raising the stakes in the Middle East. Certainly we are seeing geopolitical risk premium in crude prices this morning though as ever I’d caution that this is wont to relinquish control as long as nothing else happens to worry traders. But we also had some very bullish inventory data last week. 

FOMC Unlikely to Hike 

The FOMC is expected to leave interest rates on hold but could signal its intention for when the first cut could come. Markets have cooled on March being the trigger point – fed funds futures suggest a roughly 50-50 chance of cut at that meeting. On the one hand, the labour market is super tight still and consumer spending remains strong – note the whopper of a GDP print in Q4. BofA again: “Q4 US nominal GDP up hot 6% YoY, up sizzling 40% since COVID low (fastest expansion since stagflationary '70s)”. But inflation is down = Goldilocks. Two consecutive quarters of PCE deflator at 2%. And then the monthly number came in lower than anticipated – cue potential talk of a March pivot? That was the language following the ECB meeting last week. Powell indicated after the December meeting that something like this was possible – the question is whether they choose to make absolutely certain that inflation is tamed before they move. What’s interesting is that inflation has fallen without unemployment rising – was it all just transitory after all? 

BoE to Hold Too 

The Bank of England is also expected to keep rates on hold, but investors are watching for a change in messaging from the Monetary Policy Committee after sounding pretty hawkish all year. Markets have dialled back expectations for rate cuts in 2024 to around 100bps from 150bps amid some pretty tough talk from the Old Lady. The UK’s services sector moved further into growth in January, reducing pressure on the BoE to cut and suggesting the pessimistic consensus for the UK economy may be too gloomy. It also talked up pricing pressures from the disruption in the Red Sea.  CPI inflation rose to 4.0% in December from 3.9%, underscoring the sense that the BoE won’t be in a rush to cut – lumpy disinflation is the order of the day. However new forecasts are likely to point to rapid disinflation, which could help the BoE signal a change in tone. Last time three of the nine MPC members voted to hike, underlining the hawkish bias that exists which could make it harder to swing as swiftly to cuts as some may like.  Nevertheless, we could see the BoE remove its tightening bias from the statement, signalling that rates will need to stay high for a sufficiently long period of time to bring inflation down. The market is already assuming a lot of cuts – the BoE doesn’t need to push it further. 

Crude prices extended higher, running into the 50% retracement resistance  

FTSE 100 – bulls look to make another run above 7,700; MACD bullish crossover.