When we started 2023 most of the narrative had been centred around when we would see start to see a Fed pivot and the timing of the first rate cut.
Once it became apparent that this was somewhat wishful thinking, this narrative started to shift towards a Fed pause, even in the face of mounting evidence of a remarkably resilient US economy.
Even when the Fed downshifted the pace of its current rate hiking cycle to 25bps at the start of February, there was some disquiet that they might be sending the wrong signal to the market, about their determination to crack down on inflation.
The resilience of the January payrolls report which came in ahead of expectations at the beginning of this month started to sow the first seeds of doubt into the pause narrative, and while bond markets started to react to these shifting sands, the equity markets still held out the hope that a Fed pause was only a few weeks away.
On Friday all notion of a possible pause appears to have gone the way of the dodo, in the face of a series of better-than-expected economic data releases, with markets now pricing in another three 25bps rate increases at the March, May, and June Fed meetings.
There had already been signs that the January core PCE numbers might have been susceptible to an upside surprise after retail sales in January surged by 3%, however, Friday's sharp jump in the Federal Reserve's preferred inflation measure to 4.7%, was as unwelcome as was the upward revision to December's number from 4.4% to 4.6%. Throw in the biggest upswing in personal spending in 12 months, by 1.8%, and you have all the ingredients of a US economy that shows few signs that higher prices are weighing on demand.
US 2-year yields reacted accordingly, jumping by 11bps, above their previous peaks in November last year, to close at their highest level since 2007, at 4.813%.
It wasn't just yields in the US that moved sharply higher, with German 2-year yields rising to their highest levels since October 2008, closing above 3%
Equity markets reacted as you would expect, falling back sharply, with the DAX posting its biggest weekly fall since mid-December. The FTSE100 also rolled over quite sharply wiping out the previous week's gains in the process, although both indexes remain in their uptrends from their October lows.
The S&P500 fell sharply but managed to hold above and rebound off its 200-day SMA, even as it fell to a one-month low, with the Nasdaq 100 also rebounding off its 200-day SMA as well.
This recovery off key technical supports should offer European markets a modest rebound when they open later this morning, after last week's sharp falls.
As we look towards a new week, and the end of the month tomorrow, last week's falls have called into question whether markets in Europe can hold onto their February gains, while US markets have already slipped into negative territory for the month, after last week's sharp falls.
The US dollar appears to have accelerated its upward momentum, rising for the fourth week in a row, and is in sight of its highest levels this year, and on course to post its first positive month since September last year.
On the data front the main focus this week, in the absence of the February jobs report which has been pushed out to the 10th of March, is the latest ISM services report which is due at the end of this week and could be instrumental in reinforcing the hawkish narrative that has started to take hold in the last few weeks. A similarly strong report following on from the January report will further reinforce the case for 3 more 25bps rate hikes at the next few meetings.
In Europe, the narrative around sticky inflation appears to be evolving along similar lines, with rapid declines in headline inflation but core inflation continuing to edge to record highs.
This week we'll get to see the latest flash numbers for February, from Germany, whose economy could already be in recession, France as well as the EU, where core prices hit a record high of 5.3% in January and could well stay there in numbers due to be released towards the end of the week.
EUR/USD – the next support lies at the January lows at 1.0480/85, a break of which opens up the prospect of a test of the 200-day SMA at 1.0320. Currently have resistance at the 1.0620/30 area, and behind that at the 50-day SMA.
GBP/USD – currently sitting on support at the 200-day SMA at 1.1930, a break of which retargets the 1.1830 area. Resistance currently at the 50-day SMA at 1.2150.
EUR/GBP – continues to edge higher with the next resistance currently 0.8870. Support comes in at the 0.8780 area.
USD/JPY – closing in on the 200-day SMA and Kumo cloud resistance area at 136.90/00. Interim support at 133.60, and below that at 132.60, and 50-day SMA.
FTSE100 is expected to open 32 points higher at 7,910.
DAX is expected to open 48 points higher at 15,457
CAC40 is expected to open at 35 points higher 7,222
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