Daily Market Comment – US business activity shrinks, BoC decision up next

  • US continues to contract while Eurozone returns to growth
  • Aussie gains on accelerating inflation
  • BoC expected to deliver one last hike
  • Wall Street ends mixed, awaits more earnings results

PMIs confirm divergence between ECB and Fed interest rate bets

Although euro traders were not overly impressed by yesterday’s preliminary PMI data suggesting that the Eurozone returned to growth in January, the contrast to the US numbers that came out later in the day may have allowed euro/dollar to stay in uptrend mode.

Both the manufacturing and services US PMIs improved compared to their December prints, but stayed in contractionary territory, suggesting that business activity in the world’s largest economy continues to shrink. This is another set of economic numbers confirming investors’ view  that the Fed may need to deliver smaller rate increases henceforth and that 50bps worth of rate cuts may be appropriate by the end of the year.

Conversely, market participants remain convinced that the ECB will continue with 50bps hikes at each of its next two gatherings, despite some policymakers, like the Italian and Greek central bank governors, suggesting a more cautious approach. Investors may have put more faith in President Lagarde’s remarks. Last week, the ECB chief said that inflation is way too high and that they will stay the course of rate hikes, adding that ECB doubters should “revise their positions”.

This could continue benefiting euro/dollar heading into next week’s FOMC and ECB meetings. After breaking the key 1.0800 zone on January 12, traders of this pair may be determined to continue marching north and perhaps challenge the 1.1175 zone in the not-too-distant future. That zone is marked by the high of March 31, while it offered support between November 2021 and February 2022.

Aussie lifted by inflation data; Loonie awaits BoC decision

The Australian dollar jumped today after data showed that Australia’s inflation accelerated by more than expected in Q4, in both headline and underlying terms. The headline rate hit a 33-year high, adding to the case of more rate hikes by the RBA.

According to market pricing, there is a nearly 80% probability for a 25bps hike at the Bank’s upcoming gathering, while investors see nearly two more quarter-point increments thereafter. Combined with the optimism surrounding China’s reopening, this is likely to keep aussie/dollar in uptrend mode for a while longer.

Another commodity-linked currency, the Canadian dollar, will likely enter the spotlight later in the day as the BoC holds its first monetary policy meeting for 2023. Data releases after the last meeting convinced investors that December may not have been the last time BoC officials pressed the rate-hike button. Specifically, there is a nearly 75% probability for one more but last 25bps hike with the remaining 25% pointing to no action.

Considering that a quarter-point increment is not fully priced in, the Canadian dollar could strengthen if indeed policymakers decide to press the hike button, and it could gain even more if they reiterate the guidance that they will be considering whether more hikes are needed. That was the wording that hurt the Loonie at the last meeting, but with the market now almost certain that there will be no other rate rise, the same phrase could be interpreted as leaving the door open to additional hikes.

Wall Street trades mixed, earnings season kicks into higher gear

Wall Street traded mixed yesterday, with the S&P 500 and Nasdaq closing in the red after a rocky session marked by mixed earnings and a technical malfunction at the opening bell. The Dow Jones managed to eke out some gains.

More than 80 stocks were affected by a technical glitch, which caused confusion and resulted in wide swings in opening prices, prompting an investigation by the US Securities and Exchange Commission. And all this as the earnings season for Q4 2022 is in full swing.

The main driver behind the slide in the S&P 500 may have been the losses in industrials, but Microsoft briefly gave the index a helping hand in extended trading, with its stock gaining more than 4% before reversing lower to trade in the red. Today, after the closing bell, it will be Tesla’s turn to make its results public, with revenues expected at $24.15mln and earning per share (EPS) at $1.13.

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