Market Briefing: Markets Turn Wary Ahead of Central Bank Decisions
Traders are treading cautiously ahead of a multi-day blitz in which central bank communications could halt a months-long market rally in its tracks - or add momentum to it. Equity futures are weaker heading into the North American open, yields are slipping, and the dollar is up against most of its major peers.
The euro is trading on a slightly more supportive footing after preliminary data showed the common currency area growing 0.1 percent in the fourth quarter, beating expectations for a decline. Although numbers out of Ireland’s tax haven economy distorted overall numbers, growth in the euro area outpaced the US and China last year, proving more resilient than many expected amid a historic energy price shock and a deterioration in export markets. But inflation has also remained durable - data released this week showed French and Spanish headline and core consumer prices accelerating in January, suggesting that pressures could take longer to subside in other countries.
The European Central Bank is expected to deliver a half-percentage-point hike on Thursday with at least one more similarly-sized move coming before the pace of tightening begins to slow - but uncertainty remains around how hawkish the accompanying verbiage will sound. An overt commitment to further hikes might help push the euro to the upper end of its recent trading range, but we don’t expect a full breakout until the Fed shifts its stance in a meaningful way.
US worker salaries and benefits increased at a slower-than-expected quarterly 1-percent pace in the final three months of 2022, decelerating from the 1.2-percent increase seen in the previous quarter while (very incrementally) helping ease pressure on the Federal Reserve ahead of tomorrow’s decision.
The Fed is expected to raise rates by a quarter percentage point, but markets will be most focused on whether policymakers signal discomfort with rapidly-easing financial conditions. On the face of it, the Fed is making progress toward its core policy objectives: growth indicators are turning down and inflation prints have shown clear signs of deceleration. But a sustained surge in risk appetite could lead to renewed economic overheating, forcing the central bank into tightening more aggressively in months to come. We think Jerome Powell could take a more optimistic view on growth, emphatically pushing back against widespread expectations for late 2023 rate cuts - but markets are again unlikely to take him at his word.
The Canadian dollar is modestly higher even after the latest gross domestic product estimates showed growth flatlining in December, suggesting that monetary tightening efforts have taken a toll on one of the world’s most interest rate-sensitive economies. A preliminary estimate released by Statistics Canada showed the expansion in real gross domestic product slowing to an annualized 1.6 percent in the final quarter of 2022, with the services sector eking out modest growth while the construction, real estate, and financial services industries—the areas most exposed to higher interest rates—began to shrink. On a full-year basis, the economy performed in line with Bank of Canada forecasts, and is now expected to slow as consumers begin to cut back on spending - a development that could keep the central bank sidelined for many months.
In today’s data releases, economists think worker salaries and benefits increased at a quarterly 1.1-percent pace in the final three months of 2022, slowing from the 1.2-percent increase seen in the previous quarter. The Conference Board's consumer confidence index probably improved in January, climbing from 108.3 in December to 109.5.
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST
USD Conference Board Consumer Confidence, January
MXN Gross Domestic Product, Q4, Preliminary
EUR Consumer Price Index, January, Preliminary
USD Job Openings and Labour Turnover Survey, December
USD ADP Employment Change, January
USD ISM Manufacturing, January
USD Department of Energy Weekly Inventories
USD Federal Reserve Rate Decision
BRL Central Bank of Brazil Rate Decision
GBP Bank of England Rate Decision
EUR European Central Bank Rate Decision
USD Initial Jobless Claims, Weekly
USD Durable Goods Orders, December, Final
USD Non-Farm Payrolls, January
USD Baker Hughes Weekly Rig Count