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Big Week Beckons, Keeping Markets Rangebound

Consolidative trading patterns are dominating markets this morning as participants prepare for a banger of a week. Tomorrow’s euro area gross domestic product, US consumer confidence, and job openings prints will help set the tone before Wednesday brings Canadian gross domestic product numbers, the Fed’s preferred wage cost measure, the Treasury’s quarterly refunding announcement, and a Federal Reserve meeting. Updated euro area inflation data and the Bank of England’s latest decision will drop on Thursday ahead of Friday’s January’s non-farm payrolls report.

The greenback is holding steady, defying a slight drop in yields, equity futures are stable, commodity prices are broadly unchanged, and most major currencies remain firmly rangebound. Realized and implied volatility levels are inching lower.

The euro has seen the only meaningful move among the majors and European yields are down after several policymakers put early-year rate cuts back on the table. In an interview with Reuters, Governing Council member Mario Centeno said “We don’t need to wait for May wage data to get an idea about the inflation trajectory,” given that there is “a lot of evidence that inflation is falling in a sustained way”. In a separate interview with a French paper, his counterpart Francois Villeroy de Galhau said “We will cut our rates this year… Regarding the exact date, not one is excluded, and everything will be open at our next meetings”. Markets are now assigning near-90-percent odds to a move in April – which would be several months earlier than the June rate cut President Lagarde and Chief Economist Lane have hinted at.

Oil prices are back to pre-weekend levels after Iranian proxy organizations attacked US troops in Jordan, killing three and wounding at least 34, prompting US President Biden to threaten reprisals. Iran is attempting to distance itself, with the foreign ministry saying “resistance groups in the region do not take orders from the Islamic Republic of Iran in their decisions or actions,” but Tehran is widely understood to have supplied the weapons and training needed to execute such attacks. Broadly speaking, market participants expect tensions to remain relatively restrained, with shipping delays and rerouting efforts having only modest effects on global inflation rates – but this could easily change in the event of a broader escalation. If container rates continue to rise, central banks will have little choice but to soft-pedal rate cuts, and markets may be forced to countenance a tighter borrowing environment once again.


Still Ahead

TUESDAY

If the euro area economy avoided “technical” recession in 2023, it was a narrow escape. Consensus estimates suggest that output flatlined in the final three months of the year, recovering from a -0.1-percent contraction in the prior quarter as labour markets remained strong, credit creation bottomed, and sentiment began to improve. More softness is likely ahead in the first quarter of this year, but signs of life should begin to emerge over the coming months, helping ratify the European Central Bank’s cautious approach to easing policy. (05:00 EDT)

The ratio of open jobs to unemployed US workers likely held steady near 1.4 in December, with overall hiring levels grinding higher on continued hiring in the health care and social assistance sectors, along with a strengthening in the underlying economy. The quits rate should remain near historical averages near 2.2 percent, indicating only modest upward pressure on wages. (10:00 EDT)

With the “vibecession” now largely over, the Conference Board’s measure of consumer confidence probably continued its improvement in early January, with lower inflation and interest rate expectations helping offset signs of incipient softness in labour markets. (10:00 EDT)

WEDNESDAY

The last two quarterly refunding announcements proved to be monumental, market-moving events, but this week’s iteration should come with fewer fireworks. In line with guidance provided in November, the Treasury is expected to announce an increase in notes and bonds issuance, bringing the total refunding effort to more than $120 billion without inflicting additional strain on a market still characterized by robust demand for high-yielding, safe-haven instruments. (08:30 EDT)

The Canadian economy might have staged a modest rebound at the end of 2023. Statistics Canada is expected to report an incremental 0.1-percent gain in November – according to a preliminary estimate, the manufacturing, transportation, and natural resource industries helped offset softness in the retail sector – and December’s read could look better, with higher-frequency spending data pointing to a bigger gain in household consumption. This isn’t expected to last: consumer and business surveys are pointing to renewed weakness in the early new year, with spending and investment levels likely to resume their descent. (08:30 EDT)

Wage growth may have accelerated slightly in the fourth quarter, with the Federal Reserve’s preferred Employment Cost Index ticking higher to an annualized 4.4 percent pace from 4.3 percent in the prior quarter. This shouldn’t alarm policymakers – evidence of a “wage-price spiral” has proven non-existent in the post-pandemic years, and survey data suggests that most employers expect costs to moderate in coming months. (08:30 EDT)

The Federal Open Market Committee will almost certainly leave its major policy settings unchanged for a fourth consecutive meeting, but December’s growth and inflation data could complicate the picture for forward guidance, impacting market expectations for rate cuts in coming months. With labour markets, wage gains, and overall growth continuing to defy expectations for a slowdown, language in the accompanying statement is likely to signal greater confidence in the economy’s underlying strength – something that would ordinarily indicate an underlying hawkish bias. However, with inflation falling, real rates pushing ever farther into restrictive territory, and some signs of softness emerging in the deeper recesses of the economy, officials could add sentences referring to greater “uncertainties” in the outlook, and expressing a willingness to take measures that “sustain the expansion” – wording likely interpreted by markets as telegraphing imminent policy easing. We don’t expect an announcement on slowing the pace of balance sheet reduction at this meeting, but discussion among committee members about ensuring an “ample” supply of reserves in the system could intensify, putting the conditions in place for a move in March or April – or, perhaps, in an inter-meeting announcement. (14:00 EDT)

THURSDAY

Disinflation in the euro area likely accelerated in January as December’s year-over-year base effects faded. Markets think headline consumer price growth slowed to 2.6 percent in January from 2.9 percent in December, with the core measure slumping from 3.4 percent to 3.1 percent – a level that would put it within shouting distance of the European Central Bank’s target. A downside undershoot could boost wagers on earlier rate cuts, but we think June remains the safer bet – Teutonic influences on the central bank’s policy committee are likely to argue for a cautious approach for now. (05:00 EDT)

Markets expect a distinct dovish shift even as the Bank of England keeps all of its major policy settings unchanged for a fourth meeting. Prompted by a sharp decline in inflation pressures – projections could show price growth returning to target within the next six months, almost a year ahead of schedule – at least one official is expected to vote for a rate cut, and statement language is seen pivoting away from a tightening bias toward providing hints of easing ahead. The pound could experience an upward jolt if this doesn’t pan out however – if policymakers maintain a more hawkish footing, market consensus could shift. (07:00 EDT)

FRIDAY

The US job creation engine probably kept decelerating in an unusually-cold early January, with fewer than 170,000 jobs added – still above population growth, but below the levels reached last year. Downward revisions in the November and December numbers could see the unemployment rate pushing higher to 3.8 percent from 3.7 percent, while putting modest downward pressure on wage growth indicators. (08:30 EDT)

Will the positive vibes last?
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Higher for (even) longer