Weekly economic and financial commentary

Wells Fargo Research Team Wells Fargo

Summary

United States: The Great Divergence

Incoming economic data continue to shed light on how tighter monetary policy is placing unequal pressure across economic sectors. Interest rate sensitive segments like manufacturing and commercial construction remain under disproportionate strain, while the labor market appears to be only slowly moderating.
Next week: NFIB Small Business Optimism (Tue.), CPI (Thu.), Monthly Treasury Statement (Thu.)

International: Ebbing Eurozone Inflation Suggests European Central Bank Edging Closer to Easing

There was some mixed news from the Eurozone December CPI as headline inflation jumped to 2.9% year-over-year, but core inflation eased further to 3.4%. As long as Eurozone growth remains weak and the pace of price increases subdued, we believe the ECB will be comfortable delivering a rate cut at its April meeting.
Next week: Mexico CPI (Tue.), Japan Labor Cash Earnings (Wed.), U.K. Monthly GDP (Fri.)

Interest Rate Watch: Wait a Minute

The minutes from the FOMC's mid-December meeting suggest the committee aims to remain restrictive, though it acknowledges it may be cutting rates this year should recent progress on inflation continue. Despite market yearning for cuts, there was no large debate around when to start lowering rates.

Credit Market Insights: Index Points to Looser-Than-Average Financial Conditions

The Adjusted National Financial Conditions Index (ANFCI), a tool used by the Chicago Federal Reserve to assess financial conditions conditional on growth in economic activity and inflation, dropped to -0.51 the last week of December, suggesting looser-than-average financial conditions.

Topic of the Week: Population Growth Returns to Pre-Pandemic Patterns in 2023

New 2023 population estimates from the Census Bureau reveal the U.S. population grew by 0.5% between July 2022 and July 2023, translating to about 1.6 million new residents, the largest annual population gain since 2018. Overall, lower mortality and rebounding immigration point to population growth returning to pre-pandemic patterns.

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Wells Fargo Research Team

Wells Fargo

AUD/USD flirts with 0.7000, lowest since early August amid bullish USD

AUD/USD hits a fresh low since early August during the Asian session on Friday and looks vulnerable near 0.7000 after breaking below the 200-day SMA overnight. Against the backdrop of the hawkish Fed, a two-day rally in oil prices revives inflation fears and continues to push US bond yields to multi-year highs. Adding to this, geopolitical risks lift the US Dollar to a two-month high, overshadowing RBA rate hike bets and weighing on the pair.

USD/JPY pulls back from three-week high after failing near 159.00

USD/JPY edges lower during the Asian session on Friday, stalling its recent strong move to a three-week high of 159.00 as Japanese Yen bears turn cautious amid intervention fears. Meanwhile, the US Dollar retains a strong bullish undertone as the Fed's hawkish outlook and oil-driven inflation fears continue to push US bond yields to multi-year peaks. Furthermore, the BoJ's dovish rate hike last week might cap JPY and support spot prices.

Gold treads water below $4,300

Gold grabs some buying attention and advances marginally at the end of the week, partially retracing the weekly decline, although it is still navigating below the key $4,300 mark per troy ounce. The fresh selling bias on the Greenback and the modest decline in US Treasury yields appear to support the humble advance in the precious metal.

Crypto Today: Bitcoin and Ethereum edge lower, XRP extends recovery as macro headwinds weigh

The broader cryptocurrency market is consolidating on Friday, with Bitcoin paring losses slightly above $84,000. Ethereum declines in tandem with BTC. Ripple (XRP), meanwhile, paints a different picture.

Fed vs BoJ: Both hiked. The market only believes one of them – and the chart shows which

The Federal Reserve (Fed) and the Bank of Japan (BoJ) have just done something remarkably similar. Both central banks raised interest rates by 25 basis points (bps) last week, both are confronting inflation risks, and both signal that future decisions will depend on incoming economic data.

Fed vs BoJ: Both hiked. The market only believes one of them – and the chart shows which

The Fed and the BoJ have just done something remarkably similar. Both central banks raised interest rates by 25 bps last week, both are confronting inflation risks, and both signal that future decisions will depend on incoming economic data.