Markets fine-tune central bank rate cut expectations

Notes/observations

- Underlying theme of trimming rate cut expectations remains, with market pricing for BoE rate cuts pared once again, after Haskel said more evidence on reduced inflation persistence needed to stop voting for rate hikes. Similar story for ECB, with Kazaks overnight saying he is not as optimistic as markets on potential for a spring rate cut.

- FX is muted ahead of key inflation and growth data for Europe next week. JPY (yen) continues to weaken.

- EU Earnings Recap: Hermes is higher after FY results above estimates showed strong growth in all regions; Saab higher after Q4 saw good orders and initial FY24 guidance is optimistic, also raised mid-term targets.

- Upcoming US Premarket Earnings: MGA, NWL, PEP, TU.

- Asia closed mixed with Hang Seng under-performing at -0.8%. EU indices are -0.2% to +0.1%. US futures are -0.1% to +0.2%. Gold -0.2%, DXY +0.1%; Commodity: Brent +0.1%, WTI +0.3%, TTF -1.6%; Crypto: BTC +4.2%, ETH +1.8%.

Asia

- BOJ Gov Ueda testified that would consider keeping negative rates even if price target came into sight. Reiterated that chances were high for accommodative conditions to stay even if negative interest rates (NIRP) are abandoned.

- IMF Report noted that BOJ should raise interest rates gradually over a few years.

- Japan Fin Min Suzuki noted that he would not comment on day to day FX movements. Specifics of monetary policy is up to BOJ to decide.

- RBA Gov Bullock noted that had some ways to go to meet inflation target; Board focused on lowering inflation and had not ruled out a rate rise, but not ruled it in either.

- RBA Asst Gov Kent noted that Inflation did not need to be in 2-3% band for us to think about rate cuts. If consumption slowed quicker than expected there would be opportunity to cut rates. To consider range of policy scenarios at February meeting.

Global conflict/tensions

- Russia Pres Putin reiterated that Russia was ready for dialog with the West; US should urge Ukraine to restart talks. Russia still had not reached its goals in Ukraine. Urged US to stop the fighting in Ukraine and push for peace; Cautioned of a global war that will “bring humanity to the brink” if it deploys troops to Ukraine.

Europe

- ECB’s Holzmann (Austria, ultrahawk) reiterated stance that was chance that the ECB would not cut at all in 2024 or they would happen only at the very end of the year. Must be sure inflation is in check before first cut.

- ECB's Kazaks (Latvia, hawk, voter) stated that 2024 would be a year of rate cuts; Timing to be dependent on data; Expectations that the rates could be cut in the spring but was not optimistic on such timing. Monetary policy was working but the main risks for inflation area was geopolitics.

- BOE Haskel stated that more evidence on reduced inflation persistence was needed to stop voting for rate hikes.

Americas

- Fed’s Barkin (voter) noted that Red Sea disruptions have not rattled inflation landscape but declined to say when it will be time to cut rates.

- Fed's Collins (non-voter) stated that baseline for rate cuts this year was similar to the 75bps suggested by the Dec SEP.

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 +0.03% at 485.42, FTSE +0.15% at 7,607.15, DAX +0.08% at 16,976.81, CAC-40 -0.18% at 7,651.60, IBEX-35 -0.05% at 9,900.50, FTSE MIB +0.05% at 31,080.00, SMI -0.05% at 11,133.00, S&P 500 Futures +0.05%].

Market focal points/key themes: European indices open largely flat with a slight upward bias, but quickly turned to trend modestly lower; recent ECB speakers pushing back on rate cut hopes seen hurting sentiment; sectors that have managed gains include health care and consumer discretionary; while industrials and utilities among those trending lower; consumer staples sector dragged by disappointing results from L’oreal; luxury subsector supported after better-than-expected results from Hermes; oil & gas subsector supported after Brent popped above $80/bbl; Tesco to sell its retail banking unit to Barclays; Mondi confirms merger consideration with DS Smith; earnings expected in the upcoming US session include Pepsico, Magna International, Telus and Newell Brands.

Equities

- Consumer discretionary: Ubisoft [UBI.FR] +15.0% (earnings), Tesco [TSCO.UK] +2.0%, Barclays [BARC.UK] -1.0% (Barclays to acquire Tesco retail banking business for up to £700M), Hermes [RMS.FR] +5.5% (earnings beat; US trends), Ceconomy [CEC.DE] -4.0% (earnings), Delivery Hero [DHER.DE] -3.0% (Grab said to revive merger talks with Goto), L’Oreal [OR.FR] -7.0% (earnings).

- Technology: ams-OSRAM [AMS.CH] +9.0% (earnings; notes some recent uptick in smartphone related demand).

- Materials: Yara [YAR.NO] +6.5% (earnings, bottom line beat).

Speakers

- ECB's Villeroy (France, voter) reiterated view that ECB would probably cut rates this year.

- Czech Central Bank (CNB) Member Kubicek noted that the 2-Week Repurchase Rate might drop to 4.00% in 2024 (currently 6.25%).

- Poland Central Bank (NBP) Kotecki stated that saw 2024 annual core CPI at 5.0% (**Note: Dec Core CPI YoY was 6.9%.

Currencies/fixed income

- USD was mixed against the major pairs during a quiet session.

- EUR/USD edging towards the 1.08 area as continued ECB speak continued to foresee rate cuts but not as optimistically as market participants. German Jan CPI data was unrevised in its final reading and showing the continued improvement on the inflation front. Market currently pricing 115bps in ECB rate cuts during the course of 2024 (prior view was 120bps). Probability of an April ECB rate cut under 50%.

- USD/JPY continued to drift higher as BOJ rhetoric continued to downplay any aggressive policy shift.

Economic data

- (NL) Netherlands Dec Manufacturing Production M/M: +6.8% v -0.8% prior; Y/Y: -3.3% v -9.4% prior.

- (FI) Finland Dec Industrial Production -2.7% v -0.3% prior; Y/Y: -6.8% v +0.6% prior.

- (DE) Germany Jan Final CPI M/M: 0.2% v 0.2 % prelim; Y/Y: 2.9% v 2.9 % prelim.

- (DE) Germany Jan CPI EU Harmonized M/M: -0.2% v -0.2 % prelim; Y/Y: 3.1% v 3.1% prelim.

- (SE) Sweden Dec Private Sector Production M/M: +1.4% v -0.3% prior; Y/Y: +0.5% v -1.4% prior.

- (SE) Sweden Dec Industrial Orders M/M: 5.5% v 0.0% prior; Y/Y: -6.9% v +0.2% prior.

- (SE) Sweden Dec Industry Production Value Y/Y: +0.1% v -0.8% prior; Service Production Value Y/Y: +0.7% v -2.0% prior.

- (SE) Sweden Dec Household Consumption M/M: +0.1% v -0.5% prior; Y/Y: +0.1% v -0.4% prior.

- (NO) Norway Jan CPI M/M: 0.1% v 0.0%e; Y/Y: 4.7% v 4.6%e.

- (NO) Norway Jan CPI Underlying M/M: 0.0% v -0.1%e; Y/Y: 5.3% v 5.3%e.

- (NO) Norway Jan PPI (including oil) M/M: -3.2% v -7.4% prior; Y/Y: -12.9% v -25.6% prior.

- (TR) Turkey Dec Industrial Production M/M: +2.4% v -1.4% prior; Y/Y: +1.6% v 0.1% prior.

- (CN) China Jan New Yuan Loans (CNY): 4.920T v 4.50Te (record high).

- (CN) China Jan Aggregate Financing (CNY): 6.50T v 5.60Te.

- (CN) China Jan M2 Money Supply Y/Y: 8.7% v 9.3%e.

- (HU) Hungary Jan CPI M/M: +0.7% v -0.3% prior; Y/Y: 3.8% v 4.3%e.

- (FR) France Q4 Preliminary Wages Q/Q: 0.3% v 0.5% prior.

- (AT) Austria Dec Industrial Production M/M: -0.6% v -2.1% prior; Y/Y: -5.6% v -4.4% prior.

- (RU) Russia Narrow Money Supply w/e Feb 2nd (RUB): 18.01T v 18.03T prior.

- (IT) Italy Dec Industrial Production M/M: 1.1% v 0.9%e; Y/Y: -2.1% v -2.5%e; Industrial Production NSA (unadj) Y/Y: -8.0% v -2.9% prior.

- (GR) Greece Dec Industrial Production Y/Y: 4.3% v 3.2% prior.

Fixed income issuance

- (IN) India sold total INR330B vs. INR330B indicated in 2028, 2033 and 2053 bonds.

- (ZA) South Africa sold total ZAR vs. ZAR1.0B indicated in I/L 2031, 2046 and 2058 Bonds.

- (IT) Italy Debt Agency (Tesoro) sold €9.0B vs. €9.0B indicated in 12-month Bills; Avg Yield: 3.522% v 3.442% prior; Bid-to-cover: 1.37x v 1.35x prior.

Looking ahead

- 05:25 (EU) Daily ECB Liquidity Stats.

- 06:00 (PT) Portugal Dec Trade Balance: No est v -€1.9B prior.

- 06:00 (IE) Ireland Dec Industrial Production M/M: No est v -0.9% prior; Y/Y: No est v -29.9% prior.

- 06:00 (UK) DMO to sell £5.5B in 1-month, 3-month and 6-month bills (£0.5B, £2.5B and £2.5B respectively).

- 06:30 (IN) India announces upcoming bill issuance (held on Wed).

- 06:30 (IN) India Weekly Forex Reserve w/e Feb 2nd: No est v $616.7B prior.

- 07:00 (BR) Brazil Dec IBGE Services Volume M/M: 0.7%e v 0.4% prior; Y/Y: -2.0%e v -0.3% prior.

- 07:00 (MX) Mexico Dec Industrial Production M/M: -0.3%e v -1.0% prior; Y/Y: 1.2%e v 2.8% prior; Manufacturing Production (unadj) Y/Y: -1.8%e v -0.3% prior.

- 08:00 (PL) Poland Central Bank (NBP) Jan Minutes (two decisions ago).

- 08:00 (UR) Ukraine Jan CPI M/M: 1.0%e v 0.7% prior; Y/Y: 5.2%e v 5.1% prior.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:30 (CA) Canada Jan Net Change in Employment: +15.0Ke v +0.1K prior; Unemployment Rate: 5.9%e v 5.8% prior; Full Time Employment Change: No est v -23.5K prior; Part Time Employment Change: No est v +23.6K prior; Participation Rate: 65.4%e v 65.4% prior; Hourly Wage Rate M/M: 5.3%e v 5.7% prior.

- 12:00 (EU) Potential sovereign ratings after European close.

- 13:00 (US) Weekly Baker Hughes Rig Count.

- 14:00 (AR) Argentina Dec Wages M/M: No est v 9.1% prior.