In the final two months of last year, market players were convinced that the disinflation narrative is going to prevail and that major central banks are going to cut rates much sooner than anticipated. That resulted in aggressive pricing for rate cuts, which saw the dollar sink heavily alongside Treasury yields while risk trades ripped higher.

It settled on that note but on the first day of the new year, we’re running it all back again in reverse mode. The dollar is gaining solid ground now in European trading while stocks are seeing their opening day optimism get dashed quite badly.

EUR/USD is down 0.7% to 1.0970 while USD/CHF is up 1.1% on the day to 0.8501 currently. This comes as 10-year Treasury yields are holding higher by nearly 9 bps to 3.951%. As such, USD/JPY is also keeping in a solid spot as it is up 0.7% to 141.80 on the day.

It is just one of those things that tells you that if you’re thinking 2024 is going to be as straightforward as what markets have been saying at the end of last year, it certainly isn’t going to progress that smoothly. And that’s a big lesson that we already learned last year. Are we in for a repeat in 2024?

This article was written by Justin Low at www.forexlive.com.

There was so much promise and hope for equities coming into the new year but we’re seeing all of that get dashed on opening day as the mood turns sour. US futures were little changed and marginally higher to start the session but are now down all the way amid a steep drop in the past hour or so.

S&P 500 futures are now down 0.7% with Nasdaq futures down 1.0% and Dow futures down 0.5% currently. That has also seen European indices erase their early gains as well with the Eurostoxx down 0.4%, DAX down 0.3% and CAC 40 down 0.4% on the day.

It is still early on but all of this is helping to see the dollar firm further across the board in a run against the supposed consensus outlook for 2024.

This article was written by Justin Low at www.forexlive.com.

Last week, we saw a bit of a Christmas rally in the
Dow Jones, although some of the gains got erased in the final couple of days.
The market is all-in on the soft-landing trade with the Fed expected to cut
interest rates soon, the labour market coming into better balance and the
inflation rate on track to reach the 2% target by the end of the year. It’s
hard for the bears to fight the current positive sentiment, especially without
significant bearish catalysts, but such crowded trades are generally liable to
fast unwinding in case the prevailing narrative proves to be wrong, so the bulls
should be extra careful going forward.

Dow Jones Technical
Analysis – Daily Timeframe

On the daily chart, we can see that the Dow Jones continues
to print new all-time highs amid positive risk sentiment and the support from
the recent Fed’s pivot. From a risk management perspective, the buyers would be
better off waiting for a pullback into the most recent swing low around the
37070 level where they will also find the red 21 moving average for confluence.

Dow Jones Technical
Analysis – 4 hour Timeframe

On the 4 hour chart, we can see that the
trendline has been defining the strong uptrend since last October. Last week
though, the price broke below the trendline, and
we can also notice that the latest leg higher diverged with
the MACD. This
is generally a sign of weakening momentum often followed by pullbacks or
reversals. This might be a confirmation that a deeper pullback into the 37070
level could be in the cards.

Dow Jones Technical
Analysis – 1 hour Timeframe

On the 1 hour chart, we can see more
closely the current price action and the divergence with the MACD. The sellers should
pile in around these levels with a defined risk above the high to target a drop
into the 37070 level. The buyers, on the other hand, will likely lean on the
37070 level with a defined risk below it to position for a rally into another
all-time high.

Upcoming Events

This week is full of key economic data which will
culminate with the NFP report on Friday. We begin tomorrow with the ISM
Manufacturing PMI and Job Openings and given the recent trends there could be
room for disappointment. Later in the day, we will get the release of the FOMC
Minutes, but it’s not expected to be market-moving given that it’s three weeks
old data. On Thursday, we will have another slate of US labour market data with
the release of the US ADP and Jobless Claims figures. Finally, on Friday, we conclude
the week with the NFP report and the ISM Services PMI.

This article was written by FL Contributors at www.forexlive.com.

It is only the Australian dollar that is sitting higher than the US dollar in trading so far today. Traders adopted a more risk-on approach early on but we have seen equities pare most of that gains in European morning trade as flows are slowly trickling back in to start the new year.

USD/JPY is up 0.5% to 141.60 while USD/CHF is up 0.7% to 0.8473 currently. The former is still shying away from a test of the 140.00 mark while the latter looks to be holding above the 0.8400 level after attempted breaks below that in thin trading last week.

Meanwhile, EUR/USD is down 0.3% to retest the 1.1000 level while GBP/USD is down 0.2% to 1.2700 after some back and forth action with the high earlier touching 1.2760. It is only AUD/USD that is up 0.1% to 0.6818 but off earlier highs in Asia of 0.6839 on the day.

In other markets, gold is starting off January on a solid note with price up 0.6% to $2,075 while oil is also up 2.5% to $73.43 at the moment. In the bond market, yields are higher with 10-year Treasury yields up over 7 bps to 3.935%. It is but a small bump higher as the downtrend since November remains intact for the most part.

In the equities space, European stocks were off to the races at the open but have cooled a fair bit with the Eurostoxx now up just 0.2%, DAX up 0.5%, and CAC 40 up 0.2% on the day.

It is a time where traders are settling in and getting back their groove, with flows returning after the holiday period. So, be mindful of looking too much into the trends we’re seeing. As a side note, just be wary that we also do have US non-farm payrolls on Friday to work through this week.

This article was written by Justin Low at www.forexlive.com.

Last week, we saw a bit of a Christmas rally in the
S&P 500, although all the gains got erased in the final couple of days. The
market is all-in on the soft-landing trade with the Fed expected to cut
interest rates soon, the labour market coming into better balance and the
inflation rate on track to reach the 2% target by the end of the year. It’s
hard for the bears to fight the current positive sentiment, especially without
significant bearish catalysts, but such crowded trades are generally liable to
fast unwinding in case the prevailing narrative proves to be wrong, so the
bulls should be extra careful going forward.

S&P 500 Technical
Analysis – Daily Timeframe

On the daily chart, we can see that the S&P 500
is now roughly 1% away from the all-time high. This is truly incredible if we
think that it happened amid many headwinds like the second most aggressive
tightening in history and geopolitical attritions. From a risk management
perspective, the buyers would be better off waiting for a pullback into the
recent swing low around the 4700 level where we can also find the red 21 moving average for confluence.

S&P 500 Technical
Analysis – 4 hour Timeframe

On the 4 hour chart, we can see that the
price has been trading inside a rising channel with the latest leg higher diverging with
the MACD. This
is generally a sign of weakening momentum often followed by pullbacks or
reversals. In this case, we should see a pullback into the lower bound of the
channel where the buyers will look to lean onto to position for a rally into
new all-time highs. A break below the channel and the 4700 level would
invalidate the bullish setup and likely trigger a selloff into the 4548 level.

S&P 500 Technical
Analysis – 1 hour Timeframe

On the 1 hour chart, we can see more
closely the current price action with the recent fall erasing all the gains
from the Christmas rally. The buyers might want to split their position in half
as the price could bounce either on the lower bound of the channel or the 4700
level, where we have also the 38.2% Fibonacci
retracement level for confluence. The sellers, on the
other hand, will want to see the price breaking below the 4700 level to
position for a drop into the 4548 level.

Upcoming Events

This week is full of key economic data which will
culminate with the NFP report on Friday. We begin tomorrow with the ISM
Manufacturing PMI and Job Openings and given the recent trends there could be
room for disappointment. Later in the day, we will get the release of the FOMC
Minutes, but it’s not expected to be market-moving given that it’s three weeks
old data. On Thursday, we will have another slate of US labour market data with
the release of the US ADP and Jobless Claims figures. Finally, on Friday, we conclude
the week with the NFP report and the ISM Services PMI.

This article was written by FL Contributors at www.forexlive.com.

UPCOMING EVENTS:

• Tuesday: China Caixin Manufacturing PMI, Canada Manufacturing
  PMI.
• Wednesday: Switzerland Manufacturing PMI, US ISM Manufacturing
  PMI, US Job Openings, FOMC Minutes.
• Thursday: China Caixin Services PMI, US Challenger Job Cuts,
  US ADP, US Jobless Claims, Canada Services PMI.
• Friday: Eurozone CPI, Canada Labour Market report, US NFP,
  US ISM Services PMI.

Wednesday

The US ISM Manufacturing PMI is expected
at 47.1 vs. 46.7 prior. The last
report saw the index falling further into
contraction in November and the general commentary was pretty grim. The negative
data continued in December with the US S&P
Global Manufacturing PMI missing
expectations and reaffirming the drag on the economy from the Manufacturing
sector.

The US Job Openings are expected at 8.850M
vs. 8.733M prior. The last
report saw Job Openings falling much more
than expected with the weakest reading since March 2021. The labour market continues
to soften via less jobs availability rather than more layoffs, which
coupled with the falling inflation rate, supports the soft-landing narrative. Such
episodes occur right before a recession though, so time will tell if the
“most crowded trade on Wall Street” was indeed the right one all along.

Thursday

The US ADP is expected to show 113K jobs
added in December compared to 103K in November. The last
report missed expectations and, of course,
we got a beat across the board in the NFP report a couple of days later. Although
this release is pretty useless to forecast the NFP number, it can be
market-moving and maybe give some broad insight into the US labour market.

The US Jobless Claims continue to be one
of the most important releases every week as it’s a timelier indicator on the
state of the US labour market. Initial Claims keep on hovering around cycle
lows, which shows us that layoffs have not picked up notably yet, but
Continuing Claims have been rising at a fast pace and that’s indicative of
people finding it harder to get another job after being laid off. This week
the consensus sees Initial Claims at 215K vs. 218K prior,
while Continuing Claims are expected at 1882K vs. 1875K prior.

Friday

The Eurozone Headline CPI Y/Y is expected
at 3.0% vs. 2.4% prior,
while the Core Y/Y measure is seen at 3.5% vs. 3.6% prior. The market is
pricing in around 160 bps worth of rate cuts in 2024 with the first 25 bps cut
coming in April. The ECB members have been pushing back against the aggressive
market pricing and the consensus among the officials is that they want to
wait for Q1 data before deciding if a rate cut in Q2 will indeed be warranted.
Looking at the M/M inflation readings, the ECB can already call it “mission
accomplished” and we could see the Y/Y inflation rates falling below 2% already
in Q2 2024.

The Canadian Labour Market report is
expected to show 12K jobs added in December vs. 24.9K in November
and the Unemployment Rate to rise further to 5.9% vs. 5.8% prior. This
report is unlikely to influence the January BoC decision as the central
bank might want to see more data in Q1 before deciding on the next move,
especially after the last hotter than expected inflation
report. If you want to know more about the
2024 outlook for Canada, you can read Adam’s articles on the BoC
and the Canadian
Dollar.

The
US NFP is expected to show163K jobs added in December compared to 199K in November and the Unemployment Rate to tick higher to 3.8% vs.
3.7% prior. The Average Hourly Earnings are seen cooling further with the Y/Y
measure expected at 3.9% vs. 4.0% prior and the M/M reading at 0.3% vs. 0.4%
prior. The major central banks have ended their tightening cycles, so the
markets’ reaction function has changed from “strong data equals more rate
hikes” to “strong data equals less rate cuts”.

The US ISM Services PMI is expected at
52.6 vs. 52.7 prior. The November
report beat forecasts as the US Services sector continues to remain
resilient given its lower sensitivity to rate hikes. This tendency was
reaffirmed further with the release of the December
S&P Global Services PMI were the data
beat expectations closing the year with the fastest growth since last
July.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

1) House prices

Eight weeks ago, we might be having a very different conversation about Canadian housing. Yields were rising and central banks were offering no hints about cutting rates. Pain was certainly in the pipeline and a hard housing landing in the spring was likely.

Skip ahead and the Government of Canada five year has fallen to 3.20% from almost 4.50%. That 130 basis points will feed directly into housing. Notably though It looked like it would be the year of a housing reckoning but now it looks like the year of rate relief.

Canada has about $1.75 trillion in mortgage debt outstanding with about $250 billion coming up for renewal in 2024, with another $352 billion in 2025. Every 100 basis points is taking $17.5 billion in annual spending out of the economy plus all the multipliers on that. Compare that to around $67 billion in monthly retail sales and it’s material.

But it may be the wealth effect that’s more impactful. Going back to the start of 2023, the question then was, if housing prices fell 20% (which was merely back to 2021 levels) would consumers recoil. The answer was that they largely didn’t.

I wouldn’t take for granted that the same thing happens if prices continue down to 2019 levels or lower. At some point there is a drag and it should be noted that in mid-1990 when the Bank of Canada began to cut rates from 13% down to 5%, house prices continued to fall for two years.

Summing up, the housing market remains in a precarious state as there is something of a buyers‘ strike while sellers continue to hold out hope for high prices. If a flood of supply hits the spring market, it could easily crack the dam, even with 50-75 bps in BOC cuts in H1. Alternately, a hint at cuts could unleash the housing animal spirits again with buyers taking variable rates on the well-grounded belief that they will come down.

How that unfolds is key to the outlook for the economy but note that there is some reflexivity in play. If buyers balance out the market, the BOC is less likely to cut in 2024 and 2025 and vice versa. That has important knock-ons for the currency.

2) China

A key upside risk for Canada and the Canadian dollar is China. Sentiment surrounding China right now is ghastly, with many fund managers determining its univestible due to President Xi wanting to squeeze out housing excess and control tech companies. There’s also a strong belief that a conflict in Taiwan is more a question of ‚when‘ than ‚if‘.

At this point, I’d argue those worries are fully priced in. Chinese consumers have also been struggling coming out of covid and officials haven’t taken strong steps to reverse that. The upside risk is that they will, and they have many levers to pull given zeroed out inflation in China. If so, it would flow through to Canada via commodity demand, boosting a sector that had a tough year in 2023.

For now, I’ll file this under: I’ll believe it when I see it, but it’s a spot to watch.

3) OPEC

Angola quitting OPEC in December fanned the flames of the idea that OPEC is in an unsustainable position. They keep cutting output and US shale continues to hike to fill it. A tense December OPEC meeting eventually agreed to H1 cuts that should balance the market but all the risks are to the downside now, with further cuts unpalatable.

Eyes will be on market balances early in the year but it’s seasonally the slowest time of year so inventory builds are possible. As the year progresses, OPEC needs to see deficits emerge, which they can fill by gradually increasing output. In time, rising demand should allow them to wind down spare capacity but if shale another 1 mbpd in the first half of the year, then they may have no choice but to start an ugly war for market share; crippling Canada’s largest export just as TMX ramps up.

4) Inflation

The latest CPI was worrisome at 3.1% versus 2.9% expected and it came at the same time as inflation data undershot in most other advanced economies.

That miss should help to keep the Bank of Canada cautious at the January meeting but beyond that there is reason for optimism as easier y/y comps hit.

Two major sources of Canadian inflation right now are mortgage interest (which the BOC obviously controls) and rent (which is one of the toughest things for the BOC to affect). Scarcity of rental supply is something the BOC can’t control but the central bank has a mandate for low and stable inflation and they won’t tolerate high inflation, even if it’s driven by rent. I’d certainly argue though that lower rates would be helpful in bringing on long-term housing supply but that won’t be possible until they’ve restored credibility on low-and-stable inflation.

5) Consumer spending

This is a great chart from CIBC. It highlights how Canadian consumption has already slowed materially while in the US, demand for consumer goods has continued to rise.

US consumption will continue to benefit from low 30-year fixed mortgages while Canadian consumers will be hit with higher fixed-rate resets through 2026, even if the BOC cuts materially from here.

Ultimately, these are two consumer-driven economies and the winning currency will be largely driven by the winning consumer. The latest leg of Canadian dollar strength was all about pricing-out risks of a hard landing in the housing market — you can see that in the banking equities and REITs. That trend may extend into early 2024 and take USD/CAD down to 1.30 (or CAD/USD 0.77) but to fuel further moves we will need to see positive outcomes from housing, the consumer, China or energy. Alternatively, a path lower for USD/CAD would be broader USD weakness on a softening American consumer and economy, though some of that is undoubtedly priced in already.

This article was written by Adam Button at www.forexlive.com.

China’s Manufacturing PMI from the National Bureau of Statistics (NBS) for December has come in at its third straight month of contraction at 49.0, much worse than was expected

• from 49.5 expected and 49.4 in November

Services at 50.4, a slight miss

• 50.5 expected and 50.2 in November

Composite is 50.3, from 50.4 in November.

The private Caixin factory survey will be issued on Tuesday:

China has two primary Purchasing Managers‘ Index (PMI) surveys – the official PMI released by the National Bureau of Statistics (NBS) and the Caixin China PMI published by the media company Caixin and research firm Markit / S&P Global.

• The official PMI survey covers large and state-owned companies, while the Caixin PMI survey covers small and medium-sized enterprises. As a result, the Caixin PMI is considered to be a more reliable indicator of the performance of China’s private sector.
• Another difference between the two surveys is their methodology. The Caixin PMI survey uses a broader sample of companies than the official survey.
• Despite these differences, the two surveys often provide similar readings on China’s manufacturing sector.

During last week were comments from the head of the NDRC:

• China’s ’state planner‘ on measures to expand domestic demand, promote stable growth

• As I said in that post, efforts at boosting the economy appear to be getting some pay off:
• China’s November Industrial Profits rebound with 29.5% y/y Growth

—

ps. Here’s an interesting piece from Reuters for some holiday reading:

• How China talked markets out of a run on the yuan

This article was written by Eamonn Sheridan at www.forexlive.com.

The Bank of Canada meets eight times in 2024 and right now the market sees five or six rate cuts.

The first question is when will they start? The next BOC meeting is right around the corner on January 24 but it comes on the heels of a surprisingly-hot inflation report. CPI rose 3.1% year-over-year compared to 2.9% expected and the core measure were hotter-than-anticipated as well.

However that’s not the last word. The December CPI report will be released on January 16 and there should be some help on the core side as a 0.3% rise from December 2022 rolls off. However, the y/y headline number is likely to rise even further as a -0.6% reading from a year earlier is pushed out of the equation. That could push headline CPI upwards of 3.5% a tie BOC Governor Tiff Macklem’s hands.

A month later it’s the opposite as a high headline number disappears but a low core measure should keep it elevated.

All the year-over-year numbers will finally get some help with the February CPI report and that’s when a real downtrend will take hold. However that data point won’t be published until after the March 6 BOC meeting.

That meeting is priced at 45% for a cut right now and that sounds about right. I can easily see the BOC waiting to see how those CPI numbers fall and leaving rates on hold until the April 10 meeting.

The case for them to cut is also compelling and it partly hinges on an expectation that they will look south for cues. The FOMC meets March 20 so they will have to wait, right? I don’t think so. The Fed always strongly signals what it will do before the meeting and the blackout starts March 8, so there is a good chance the BOC will know what the Fed is going to do. Right now the March Fed meeting is at 100% so in a situation where that doesn’t change, I would expect the BOC to step to the front of the line. Also note that the March ECB meeting comes a day after the BOC.

In any case, the April 10 will certainly be live. Current pricing is at 100% — almost exactly — with the June 5 meeting pricing in 72 bps from now.

Turning back to the CPI numbers, the headlines were so hot from Jan-May 2023 and those will slowly roll off. So by the time we get to next June, we could be looking at very low Canadian CPI numbers.

In the four remaining meetings in 2024, cuts are fully priced for three of them with a 40% of a fourth.

That takes us back to housing, by June we’ll have a very good idea of how the spring housing market goes. If banks continue to be reluctant to pass on lower market rates, then we could have trouble. Odds are that we get at least moderate pain and at that point, I think the BOC blinks and 50 bps cuts start. I will also be closely watching Canadian consumer spending, which has been stumbling.

What about 2025?

The OIS market is now pricing in about 225 bps in cuts in total through 2025, which would get the BOC to 2.75%. I think they end up at 1.75%, which is where they were in 2019 before the pandemic.

In contrast, here are the forecasts from the Canadian big banks, via Steve Hueble at Canadian Mortgage Trends:

This article was written by Adam Button at www.forexlive.com.

It was a lively year in the FX market with the yen going on a particularly wild ride but ultimately it was the Swiss franc that came out on top as USD/CHF fell nearly 9%.

At the other end of the spectrum was the Japanese yen as it was the G10 laggard for the third straight year, falling 7.6% in spike of a huge rally over the past six week.s

Right in the middle was AUD/USD, which started the year at 0.6813 and finished the year at 0.6810. That’s a whole three pips for the patient shorts 🙂

We hope you had a more-profitable year than that but overall I’m struck by the small size of most of the moves and the relatively narrow ranges. EUR/USD traded this year entirely between 1.0447 and 1.1275, which is far narrower than the usual 15-20-cent range.

Expanding beyond the G10 group, the Russian ruble had another dismal year while the Mexican peso gained an admirable 13%, in its best performance in more than 30 years.

This article was written by Adam Button at www.forexlive.com.