From Markets to Economics – and Other Things You Need to Know – Executive Summary

PMI data generally surprised on the positive side, with the US manufacturing sector expanding for the first month in seven months and reaching a 15-month high. Wall Street indices continued to push the S&P 500, Nasdaq and Dow Jones indices to historic highs in the first half of the week, thanks to positive business results and the economic “no bear” mantra. Wall Street indexes reached all-time highs at the start of the week, although their lack of volatility led to doubts that the recovery was losing momentum.

This week, China announced new incentives to support the stock market and cut its benchmark interest rate to release long-term liquidity into the financial system. The latter appears to have been the catalyst that finally led Chinese indices to recover strongly from their lows. Japan's exports were a positive surprise, as they revealed increasing global demand, especially from the United States of America.

The Bank of Canada kept interest rates at 5% for the fourth month in a row, but warned of the risks of core inflation and backed away from cutting interest rates, saying it was “too early” to discuss them.

The Bank of Japan kept its policy unchanged and lowered its CPI target for fiscal 2024, which also indicates the Bank of Japan's reluctance to unwind its stance. Very dovish Written by Haruhiko Kuroda, Governor of the Bank of Japan, to reinforce the possibility of no changes.

Highlights from next week

Wednesday 31 January at 19:00 GMT: FOMC interest rate decision and press conference.

Although the vast majority agree that the Fed will not change policy next week, this remains the biggest event on the calendar. Fed Funds futures indicate a roughly 98% probability of a hold on Wednesday, or a 5% probability of a hold in March. Although the implied yield curve is flatter Dovish Compared to 20 days ago, it still proposes cuts of -122 basis points by December, which represents about five full 25 basis point cuts. As always, investors will focus on the statement and press conference for clues about the possibility of cuts. However, if recent comments from Fed officials are anything to go by, it will be a big surprise if they make a complete U-turn. Dovish In your contacts next week. This means that investors will be quick to shift their focus to the subsequent ISM Manufacturing and Nonfarm Payrolls report.

Thursday 1 February at 12:00 GMT: Bank of England interest rate decision

The latest data has effectively eliminated any hope of the Bank of England cutting interest rates next week, or ever. CPI data rose unexpectedly in December, and PMI data also beat expectations as factor costs rose.

Investors should pay attention to any changes between Monetary Policy Committee votes to increase or maintain interest rates. At the last meeting there were three votes in favor of the increase and six in favor of maintenance, so if we see four or more votes in favor of the increase, this indicates that the Bank of England is more aggressive in light of the data being made. Although this may not necessarily lead to an increase in the future, it will almost certainly prolong the maintenance of interest rates at the current level of 5.25%.

Thursday 1 February at 15:00 GMT: US ISM Manufacturing PMI

Standard & Poor's' rapid global manufacturing PMI survey estimated that the industry expanded in January. It could have greater weight if the long-term ISM Manufacturing Study followed suit. The ISM appears to have fallen in June but has held steady at contraction levels of 47.4, but if it suddenly contracts at a much slower pace with the expansion (above 50), this could trigger another round of USD short covering.

Friday, February 2 at 1:30 PM GMT: Change in US non-farm payrolls

Since next week's ISM and NFP reports will come after the FOMC meeting, it's really about shaping expectations from the March meeting. It may take a fairly weak set of numbers to convince investors that the cut could arrive as early as March. In all likelihood, the report will provide another set of good numbers. We will need to see unemployment rates rise sharply and negative jobs in the agricultural sector emerge before we expect the Fed to simply pause policy.

XTB analysis