While the past week has been a quiet one on the macro data front, central bankers sent some hawkish signals ahead of the January rate decisions. The Fed’s Waller remained confident that sustainable 2% inflation is within ‘striking distance’, but he also underscored that there is no reason to cut rates as quickly as in the past. Just ahead of the ECB’s silent period, Lagarde noted that rates will likely be cut only by summer and Knot cautioned that markets have been ‘getting ahead of themselves’.
As a result, yields edged higher throughout the week as market pulled back on expectations of rapid rate cuts. We expect the ECB to cut rates by a total of 75bp in 2024 and the Fed by 100bp, so with around 130-140bp of cumulative cuts still priced in for both central banks, we generally see further upside risks to pricing from here. We expect few, if any new policy signals from next week’s ECB meeting but we will look out for signals on the most likely timing of the first cut, which we have pencilled in for June. Read more details from our full ECB Preview – Stocktaking, 18 January.
Rising yields were also reflected in weaker equities and cyclical currencies while the broad USD regained strength. In the FX markets, we expect similar trends to continue also later in the year, as we see EUR/USD heading towards 1.05 and EUR/SEK rising to 11.60 on a 12M horizon in our latest FX Forecast Update – 2024 to prove a good year for the USD, 15 January. One key argument for our bullish USD view has been the continuing US economic outperformance vis-à-vis peers and, this week, the December retail sales data confirmed that consumer demand has remained solid. Widely followed control group sales growth surprised clearly to the upside at +0.8% m/m SA.
US election year kicked off with Republican Iowa caucuses, where Donald Trump clinched a convincing victory with 51% support over Ron DeSantis (21%) and Nikki Haley (19%). While the result was well in line with polling averages, it marked a disappointment especially for DeSantis who had put significant campaigning effort into Iowa. Primaries will continue next Tuesday in New Hampshire, where the pressure is on Haley, who has been performing relatively well in recent local polls. Read more on the primary elections and the US fiscal and foreign policy outlook in Primer for 2024 elections, 15 January.
Besides the ECB, also the Bank of Japan will have a monetary policy meeting where we expect an unchanged rate decision. Wage growth remains the missing piece of the puzzle before the BoJ can look towards rate hikes and letting go of the yield curve, but we will likely have to wait for the spring wage negotiations for hard evidence. The People’s Bank of China will also likely make no changes to the Loan Prime Rate on Monday after the Medium-term Lending Facility rates were left unchanged this week. Finally, we also expect an unchanged rate decision from Norges Bank on Thursday.
On the data front, January Flash PMIs will provide the first hints on how major economies have fared at the beginning of 2024. Generally, leading data has suggested that global manufacturing activity might have reached a trough in late 2023, while services growth momentum remains muted. We will also keep an eye on the US Q4 Flash GDP and December PCE data.
Full report in PDF.
