Pre Asia open: A fuelled optimism

Markets

On Friday, US equity indexes surged to historic peaks, while Treasury yields experienced a sharp decline. These movements came in response to weak US economic data and remarks from Federal Reserve officials, which strengthened expectations for interest rate cuts later in the year.

The Institute for Supply Management (ISM) reported that its manufacturing Purchasing Managers' Index (PMI) dropped to 47.8 last month from 49.1 in January, marking the 16th consecutive month that the PMI remained below the 50 threshold, indicating a contraction in manufacturing activity.

Additionally, the University of Michigan's consumer sentiment surveys showed declines beyond expectations across all three measures: sentiment, current conditions, and consumer expectations.

While this is good news for those banking on easier monetary policy, the data conundrum, some hot, some cool, may persist this week as markets await insights from Federal Reserve Chair Powell and the upcoming payroll figures.

AI fuelled optimism

The optimism surrounding artificial intelligence (AI) has bolstered investor confidence and translated into tangible revenue and earnings growth for these tech giants. In the fourth quarter, the Magnificent Seven reported a 15% year-over-year revenue increase, with analysts projecting an annual sales growth rate of 12% through 2026.

These figures underscore the notion that the current rally is supported by solid footings, with robust revenue growth and earnings potential driving the sustained upward trajectory of these tech stocks.

The release of UBS's 2024 Global Investment Returns Yearbook offers valuable insights into long-term performance data, highlighting a key observation: historically, most returns earned by investors have occurred when central banks were either lowering interest rates or maintaining them at lowered levels.

This finding underscores the significant impact that monetary policy decisions can have on investment returns over the long term. When central banks implement accommodative monetary policies by reducing or keeping borrowing costs low, it stimulates economic activity and encourages investment across various asset classes.

Indeed, this is right out of Chapter One of the Modern Day Playbook For Stock Market Operatators, so in theory, one should never pass up an opportunity to buy stocks into an easing cycle, even more so if the rate cuts are happening in an economy that is touching down for soft landing.

Forex markets

The reaction to the weaker US data appeared more subdued in the foreign exchange (FX) markets as investors awaited key events that could shed light on central bank policy directions. 

The movement of the dollar often reflects expectations surrounding monetary policy shifts. The current calmness in FX markets may be attributed to anticipating significant upcoming events. Indeed, traders are long tired of getting caught in the US economic whipsaws.

One such event is Fed Chair Jerome Powell's scheduled testimony before Congress this week, during which he will likely discuss monetary policy and its implications. Additionally, the imminent publication of the February jobs report, slated for Friday, is expected to have a notable impact on the outlook for interest rates.

The current consensus forecast for nonfarm payrolls (NFP) stands at 190,000. However, there is a sense among the street that this figure is somewhat arbitrary, resembling the outcome of a random number generator. This sentiment arises from the discrepancy between the NFP data and other weekly secondary indicators of the job market, which have remained relatively robust.

Given the uncertainty surrounding the NFP figure, traders may opt to rely on longer-term rolling averages to gauge stability in the job market amidst the unpredictability of one-off reports, allowing them to contextualize the current NFP data within broader trends and patterns, providing a more nuanced understanding of the labour market dynamics.