The U.S. economy’s surprising strength puts a brake on interest rate cuts!
The eyes of the financial markets continue to remain on the Federal Reserve and its decisions on interest rates and monetary policy. We remind you that after many increases, interest rates in the United States are in the 5.25% – 5.50% range. This was seen as a necessary measure to combat high inflation that had reached a record level for several decades. Inflation has significantly reduced but the United States economy did not suffer significant effects, and the eyes are now on when interest rates will fall. The estimates of the last few months referred to next March, a scenario that until now had the highest probability. But the developments of the last week have moved the most likely date to next May.
As widely anticipated, the Federal Reserve maintained the benchmark interest rate at the range of 5.25%-5.50%. However, significant adjustments in the Federal Open Market Committee (FOMC) statement and remarks from Chairman Jerome Powell prompted a shift towards risk aversion, leading to a sharp fall in stock prices and an increased demand for the US Dollar. In a pivotal moment during the press conference, Chairman Powell significantly reduced expectations for an interest rate cut in March. He also stated that a reduction in rates wasn’t the primary expectation and stressed that the FOMC is not in a position to start considering rate cuts.
On Friday, the release of the January Non-Farm Payrolls (NFPs) report hid a positive surprise. The United States reported the addition of 353,000 new jobs, nearly twice the forecasted 180,000. Additionally, the unemployment rate remained steady at 3.7%, defying expectations of a rise to 3.8%. Moreover, Average Hourly Earnings increased by 4.5% year-over-year, surpassing predictions. This news propelled the U.S. dollar upwards, as it further diminished the likelihood of forthcoming rate cuts.
The above developments changed the probability of a rate cut in March to 38%, according to the FedWatch tool. It should be remembered that this probability was over 60% a month ago.
Moving to Europe, it seems that the European economy has been most affected by high interest rates. Germany and the Eurozone are notably struggling with macroeconomic difficulties. Recent preliminary data for their Q4 2023 GDP show that the German economy saw a decrease of 0.3% in the quarter ending in December. In January, there were developments regarding inflation, with the Eurozone’s inflation rate reported at 2.8%. These decreases in inflation have raised expectations for an impending rate cut by the European Central Bank, although the situation is more ambiguous compared to the United States.
In the other major pillar of the world economy, which is China, we have had developments too. Manufacturing activity in China showed an improvement last month. China has long faced significant economic difficulties related to real estate and deflation, which shows a decline in consumption. It is also important to note the decrease in direct foreign investments in the country. Country Garden, a financially troubled developer, announced on Saturday that over 30 of its projects have been designated by Chinese local governments as eligible for financing support. This move is part of efforts to provide liquidity to the beleaguered real estate sector. Similar measures from the Chinese economy are expected to boost the overall climate.
U.S. equity markets moved up last week, due to a strong upward rally we saw from Thursday onwards. The stock indices in Europe ranged from tentative to corrective. In the commodity market in addition to the rise of gold a great sensation was caused by the fall in the prices of oil and copper. Bond yields fell, with the yield on the U.S. 10-year bond closing marginally above 4% on the week close. The U.S. dollar continued to dominate the currency market, completing its fifth consecutive upward week. Bitcoin and most cryptos have had a profitable week.
The week that has just begun does not contain such important announcements about the U.S. economy, but the issue of interest rates will again come into focus mainly through speeches given by Fed officials. Jerome Powell will start this cycle of speeches on Monday. The investment community also expects a special interest in the announcement of inflation in China. Investors and traders will also expect to turn their eyes to the announcement of inflation in United States prices in the week after next.
The US SP500 index was bullish last week as it closed at 4,959 points and profits close to 1.40%. SP500 managed to perform new all-time high prices for three consecutive weeks. On Wednesday, Jerome Powell (head of the Fed) rejected the possibility of an early interest rate cut, indicating that any adjustments are more likely to occur later in the year. This stance marked a departure from previous communications, signaling a shift in the Fed’s approach to monetary policy and the end of the cycle of rate hikes. This fact caused a correction in the stock markets as the investors had assessed that the rate cuts could start in March. The biggest part of last week’s profitable performance though belongs to Friday. On Friday there was the release of Non-Farm Payrolls in the USA where we saw a significant rise in employment. In January, 353,000 jobs were added, surpassing not only the previous month’s increase of 333,000 jobs but also exceeding market expectations, which were initially set at 180,000. This robust job growth helped maintain the unemployment rate at a steady 3.7%, contrary to market predictions of an increase to 3.8%. It seems that the U.S. economy remains robust even if the money cost is very high. Strong quarterly performances by Meta Platforms and Amazon.com contributed to a positive momentum in the SP500 index. On the other side, some concerns were created after Apple announced a significant reduction in sales in China. China holds around 20% of Apple’s sales. The milestone target of 5,000 points is very close for SP500 and it’s possible to achieve it so we may try long positions this week.
The German DAX40 index was bearish last week, closing at 16,918 points, with losses of 0.25%. Even if DAX40 underperformed the U.S. stock indices, it still remains close to its all-time high. Several factors affect the European markets in the current period. Of course, the main focus is on the ECB and the date that it may start cutting interest rates. Things are not very clear in this case although Christine Lagarde has mentioned recently that this could happen during the summer. But more specifically, Germany faces important internal issues. Farmers in Germany are currently staging protests against a proposal from Berlin to gradually eliminate tax incentives for agricultural diesel to address budgetary concerns. They argue that such a move would put them at risk of financial hardship and potential bankruptcy. Also, the financial data released last week were not encouraging. The German GDP dropped by 0.3% in the last quarter of 2023 and retail sales dropped by 1.7% in December. The manufacturing PMI was announced at 45.5, still very far from 50. The only positive news came from inflation which was significantly reduced last month as it was announced at 3.1%. It’s still very above the target of 2% though. We believe that the cumulative problems of the German economy could be reflected in the DAX40 so we may try short positions this week.
The British FTSE100 index moved downward last week, closing at 7,615.5 points, losing about 0.25%. Beyond any doubt, the central event of the previous week regarding the UK economy was the interest rates decision by the Bank of England and the following press conference of Andrew Bailey. As anticipated, the Bank of England has chosen to maintain interest rates at its current level of 5.25%. The vote breakdown highlights an ongoing division within the committee, with six members supporting an unchanged rate, two in favor of a 0.25% increase, and one in favor of a 0.25% decrease. The Bank of England adopted a more balanced approach to monetary policy by eliminating its inclination toward tightening. The vote split was less hawkish than before, and the Band of England exhibited greater confidence in the sustainability of inflation trends, as anticipated. Andrew Bailey was reticent in the press conference by saying “We are not yet at a point where we can lower rates”. The current week does not contain important scheduled economic announcements for the UK economy so the speculation will take place on the monetary policy and interest rates. We prefer short positions this week.
The previous week was bullish for gold, with the next month’s futures closing at $2,036.1 and profits close to 1%. The Federal Reserve’s more aggressive stance, as emphasized by Chair Jerome Powell’s recent remarks, is diminishing the likelihood of substantial interest rate reductions. This situation is diminishing the attractiveness of gold, which typically performs well in environments with lower interest rates. The other big event of the last week after FOMC was the NFPs which reflect the robustness of the jobs market in the USA. The result was impressive and caused a bullish rally for the U.S. dollar. Although there has traditionally been an inverse correlation between gold prices and the value of the dollar, the dollar’s recent strength, especially following the favorable jobs report, is making gold less attractive. This week, the focus of the gold investors may shift to China and the inflation announcement that will be released on Thursday. In 2023, the World Gold Council reported that gold demand reached unprecedented levels, driven by ongoing geopolitical unrest and sustained economic downturns in China. The total volume of gold transactions escalated to 4,899 tons, up from 4,741 tons in 2022, accounting for both over-the-counter transactions and stock flows, which indicate shifts in commodity exchange inventories. The People’s Bank of China emerged as the largest purchaser of gold in the previous year, acquiring a total of 225 tons, which increased its gold reserves to a total of 2,235 tons. It’s clear why and how the economic situation in China and especially the inflation could affect gold prices. We prefer short positions this week.
Last week was strongly bearish for oil with the next month’s futures closing at $72.28, with losses of more than 7.30%. The decline in oil prices was driven by U.S. economic data indicating a reduced probability of immediate interest rate cuts by the Federal Reserve. Strong job creation numbers in the U.S. have led to a stronger dollar, which has an impact on global crude oil demand. This suggests that elevated interest rates, which can dampen economic expansion and, consequently, the oil demand, are likely to continue in major economies. The oil market was also influenced by geopolitical developments. News of a potential ceasefire between Israel and Hamas temporarily reduced some geopolitical risks in crucial shipping routes, which contributed to the drop in oil prices. Meanwhile, OPEC maintained its existing production policy so there were no serious developments regarding the oil supply from its members. Another critical factor regarding oil price movements is China. Worries about China’s economic rebound continued to weigh on the oil market. There are certain concerns that the China economy faces certain issues, mostly in the real estate industry. Low consumption adds more concerns so the inflation announcement on Thursday is of great importance. Last week’s decline was heavy and we believe that it was a markets’ overreaction so may try long positions this week.
EURUSD (Euro – US Dollar)
Last week was bearish for EURUSD as it opened at 1.0843 and closed at 1.0784. The U.S. dollar was profitable for the fifth week in a row, heavily affecting the exchange rate. Of particular importance was Friday as there the dollar’s gains were maximized and brought about the weekly result we saw. On Friday, the United States labor market was announced which had an impressive result as we have seen in the general comment. The robust labor market signaled the markets that high interest rates from the Fed could wait for a while longer as the impact on the economy is small. In the Eurozone, inflation fell to 2.8%, but markets are far from certain about the European Central Bank’s plans. Investors have stuck to Christine Lagarde’s recent statement that the reduction in rates could start next summer. About the Fed’s next plans, we may learn more from its officials who will give speeches this week. The PMI indicators for Europe and the US as well as Eurozone retail sales announced this week will give a better picture. The strength of the U.S. dollar remains undisputed so we may try sell positions for one more week.
GBPUSD (Great Britain Pound – US Dollar)
Bearish was the last week for GBPUSD, as it opened at 1.2696 and closed at 1.2631. In addition to the strength of the U.S. dollar, which also dominated this exchange rate, markets were affected by the Bank of England’s decision on interest rates and monetary policy last Thursday. The decision was to keep interest rates unchanged at 5.25% but this was largely anticipated by markets. Attention was therefore mainly given to the monetary policy report and the press conference that followed. Andrew Bailey, the head of the Bank of England addressed questions from journalists after the Bank of England’s decision. Some of his phrases were considered as dovish. Andrew Bailey said, “We are not yet at a point where we can lower rates” and that “we will not maintain the policy stance any longer than we need to do”. These statements even if they seem contradictory were interpreted as dovish by the investment community. After all, the high inflation that persists in the United Kingdom probably does not allow for hasty decisions. Apart from PMI indicators, the rest of the week contains no major announcements on the UK economy. We may try sell positions this week.
USDJPY (US Dollar – Japanese Yen)
USDJPY was slightly bullish last week, opening at 148.01 and closing at 148.33. Markets continue to assess the likely date the Bank of Japan will change its very loose monetary policy and negative interest rates. To some extent, this was anticipated by the markets and the exchange rate recently had strong downward trends. But as long as that did not happen, the strengthening of the yen faded and the exchange rate began to be influenced again by other factors such as the U.S. dollar and bond yields. Bond yields last week had no significant moves so the exchange rate was not seriously affected by them. On Friday though, a positive U.S. labor market picture lifted the U.S. dollar and gave the exchange rate a weekly upside. As far as macroeconomic results are concerned, the unemployment rate fell last month marginally to 2.4%, while retail trade and industrial production were down on expectations. Markets were buoyed by increases in foreign capital in Japanese stocks and bonds as well as a significant increase in the yield on Japan’s 10-year government bond. Sell positions is our selection for the current week.
EURJPY (Euro – Japanese Yen)
Bearish was last week for EURJPY which opened at 160.45 and closed at 160.05. The Japanese currency continued to weaken on the logic that the Bank of Japan continues its very loose monetary policy and negative interest rates. Markets expect a change in this policy this year, but as long as this is not the case, the central banks ‘ rates spread has a negative impact on the yen. However, the euro has not been able to take advantage of this situation because the European economy is not in good shape and because there is an ambiguity about when the European Central Bank will start cutting interest rates. If there is a downward movement in the EURJPY while the yen is weak one can assume that if it strengthens, there could be a strong downward trend. On this basis, we will choose sell positions this week.
EURGBP (Euro – Great Britain Pound)
Last week was neutral for the EURGBP, as it opened and closed around 0.8540. This balance between the euro and sterling is justified by two reasons. The first reason has to do with the central banks of the two economies, the monetary policy they implement, the level of interest rates, and the markets ‘ expectations of starting cutting these rates. The two economies continue to have high inflation that encourages them to maintain high rates. The second reason for the balance in EURGBP is more technical. The price has come quite close to the critical support of 0.85 and if it falls just below that threshold it will be in a price range that we have not seen since August 2022. Considering that British sterling could strengthen further since the ECB has been calling for an interest rate cut in the summer but no such statements exist for the Bank of England. For this reason, we may try sell positions this week.
USDCAD (US Dollar – Canadian Dollar)
Bullish was the last week for USDCAD, as it opened at 1.3449 and closed at 1.3466. The big strengthening of the U.S. dollar had a catalytic effect on the path of the exchange rate. Jerome Powell’s statements on the reduction of interest rates made it difficult to make such a reduction in March. As of Friday, the robust labor market of the United States showed investors the economic situation of the United States allows for the maintenance of high interest rates. Another reason for the USDCAD to rise was the large decline in oil prices. We remind you that oil has been strongly tied to Canada’s economy since it is the country’s main export commodity. The improved state of the Canadian economy has not been able to reverse the bearish result for the pair. Canada’s economy grew at a 0.2% pace in November, which exceeded market expectations. We may try buy positions for one more week.
USDCHF (US Dollar – Swiss Franc)
The USDCHF had an upward course last week as the opening price was at 0.8608 and the closing price was at 0.8669. The exchange rate largely followed the course of the U.S. dollar. The dollar strengthened for the fifth week in a row, pushing the exchange rate higher. Switzerland’s economic announcements had a neutral sign and so did not create any strong trend for the Swiss franc. Imports, exports, and the trade balance performed well while retail sales, the KOF leading indicator, and the SVME index were below market expectations. This week the unemployment rate is announced for the Swiss economy but believing in the strength of the US dollar we will choose buy positions.
AUDUSD (Australian Dollar – US Dollar)
Bearish was the last week for AUDUSD, which opened at 0.6573 and closed at 0.6512. In addition to the strength of the U.S. dollar, which logically pushed the exchange rate to lower levels, in particular, the Australian dollar had an image of weakness too. Inflation in Australia de-escalated last month at a quick pace after it was announced at 4.1%, significantly lower than the previous month’s 5.4%. This has given the impression to the markets that the Bank of Australia will not be so aggressive and that it might start cutting interest rates soon enough. One other reason that has negatively affected the Australian dollar is the problematic picture that China’s economy has been showing lately as we have seen in the general comment. Sell positions is our selection for this week too.
Last week, Bitcoin was bullish and closed at $42,570 with profits of 1.30%. Looking at the weekly chart, it’s evident that Bitcoin has experienced minimal movement, essentially remaining stagnant. It appears to be in a consolidation phase, lacking a compelling catalyst to drive it in any particular direction. The approval of Bitcoin ETFs has been already consumed by the crypto community so now, other factors may come into focus. The central banks and the interest rate decisions are a good reason for crypto movements. Cryptos are a low-risk option and the economic sentiment that is very affected by the money cost is a significant factor. Also, the performance of the major economies contributes to the investors’ decisions regarding the cryptos asset class. Going back to the crypto-specific news, Bitcoin is displaying renewed strength, with diminished selling pressure attributed to the redemptions in the Grayscale Bitcoin Trust. A forfeiture notice dated January 10, which gained attention on social media on January 24, reveals the government’s intention to liquidate 2,934 Bitcoins. While some members of the cryptocurrency community expressed concerns that this auction could result in a substantial “dump” of Bitcoin, many analysts argued that the sale would be relatively insignificant compared to the recent outflows from the Grayscale Bitcoin Trust in the past week. As per Bitcoin’s price action, it seems that the critical support at $40,000 is a reliable cushion so we may try long positions for one more week.
The information in this report is of a general nature only. It is not a piece of personal financial advice. It does not take into account your objectives, financial situation, and personal needs.
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