The ‘big three’ central bank meetings came and went last week, rates were hiked in accordance to market expectations, and the market interpreted communications as generally dovish. However, in currency markets these announcements were overshadowed somewhat by the US labour market report for January, which blew away all expectations and sent interest rates and the dollar soaring on Friday. Not only is the US jobs market not loosening despite all the Fed tightening, but it seems to have entered another leg higher. The dollar topped the G10 performance tracker last week, although emerging market currencies held up fairly well, especially those in Asia that are poised to benefit from the end of zero-COVID policies in China.
With the Fed ready to ease off the brake, while the ECB still has a lot of tightening to do, the environment should remain generally euro-positive, despite last week’s pullback. However, uncertainty is high, and all central banks will be poring over upcoming inflation data obsessively. No such data from the major economic areas is on tap this week, so the focus will instead be on a raft of speeches from officials at the Federal Reserve, ECB, and Bank of England. The sole exception will be the January CPI data out of China on Friday, where we expect inflation to rise rapidly and converge with levels prevailing elsewhere now that the COVID lockdowns are a thing of the past.
The Bank of England’s communications were interpreted by markets as a dovish pivot last week, and gilt yields ended the week down nearly 30bps. The strikes may have added to the gloomy sentiment, and sterling ended the week down against every G10 currency, save the Norwegian krone. We think that investors may be overreacting to this ‘dovish pivot’, since the Bank of England’s views have proven quite erratic over this tightening cycle. Core inflation in the UK has yet to show any sign of easing, and growth prospects were revised higher once again. At any rate, incoming inflation data will be even more important than before. No such data is on the docket this week, so the focus will instead be on MPC speakers and the provisional numbers for fourth-quarter GDP growth.
The Eurozone seems to have avoided a recession in the last quarter of 2022. The ECB acknowledged as much by hiking rates 50bps, as expected. We were a bit puzzled by the market’s interpretation of last week’s meeting, which was perceived as dovish by investors. Another jumbo hike was telegraphed for the March meeting, and Lagarde made repeated references to the resilience of core inflation, an issue that we have been highlighting for some time. At any rate, as elsewhere, the key in the coming months will be upcoming Euro Area inflation prints. We note that this week’s January report brought yet another upward surprise, with core inflation remaining at the all-time high of 5.2%.
Chair Powell’s press conference after the FOMC meeting was interpreted as dovish, but the strong data out on Friday quickly rendered such disquisitions obsolete. The US jobs market appears to be actually accelerating. In addition to Friday’s blockbuster job creation and unemployment numbers, record high job openings and record low jobless claims indicate that it has, if anything, become tighter despite the significant rate hikes by the Federal Reserve. ISM business sentiment numbers also rose sharply to levels consistent with boom conditions. Rates actually ended the week higher in the US, and the dollar’s retreat seems to have stopped for now. As elsewhere, we think that the next inflation numbers will be far more important than overinterpreting central bank communications.