Head of FX Strategy
Summary: Market expectations for the Fed path has come back in-line with the December dot plot, with Fed speakers turning hawkish at the margin since the bumper January jobs report. While US CPI is key early in the week, focus will shift back to Fed commentaries later in the week.
Market narrative has shifted swiftly from recession at the end of 2022 to soft landing in early 2023, and expectations of a re-acceleration in cyclical growth on the back of a strong labor market are now picking traction. Bond markets are starting to reflect this changing perception, with yields rallying strongly. US 2-year yields reached their highest levels since November, above 4.5%. Market pricing of the Fed’s path has also started to converge with the December dot plot, bringing the terminal rate to 5-5.25% and slowly pushing out the two rate cuts priced in for this year.
A general hawkish tilt has returned in Fed communications, but this week US CPI will dominate the rhetoric in the first half of the week. If inflation is hotter than expected, or even if continues to be sticky, the disinflation narrative started by Chair Powell at the last Fed meeting could continue to come under the scanner. A host of Fed speakers are lined up for the week, and their take on the inflation and jobs data could continue to unnerve the markets.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
