By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – January’s US CPI data provided little concern, with the core metric printing cycle lows, sparking a risk-on vibe on Friday, as focus now turns to a jam-packed week ahead.
WHERE WE STAND – It proved to be a risk-on, if somewhat subdued, end to the trading week on Friday, as last month’s US CPI report gave little cause for concern, and as Stateside participants cruised into the long weekend.
In terms of that CPI data, headline prices rose a cooler-than-expected 0.2% MoM/2.4% YoY in January, with that annual rate being the slowest pace since last May, albeit somewhat flattered by a favourable base effect. Still, measures of underlying inflationary pressures were also relatively upbeat, with core CPI rising 2.5% YoY (a cycle low), and supercore inflation rising 2.7% YoY.
While that data shan’t materially alter the near-term policy path, with the FOMC set to maintain their ‘wait and see’ approach for now, particularly in light of the solid January jobs report that we also got last week, ongoing disinflation does support the notion that the direction of travel for the fed funds rate remains lower, and that further cuts will be delivered this year, albeit likely once Kevin Warsh takes over as Chair in mid-May.
Sticking with monetary policy, we heard from BoE Chief Economist Pill as the week drew to a close. Frankly, I would love to know what Mr Pill has been smoking recently, given his view not only that the MPC ‘need to maintain policy restrictiveness’, but also that Bank Rate is currently ‘a little bit too low’. Frankly, in my mind, both of those remarks are utter nonsense – the UK labour market is falling off a cliff, economic growth is effectively non-existent, and inflation will have returned to the 2% target by the spring.
What the MPC should be doing is getting Bank Rate back to neutral – 3% – as quickly as possible, with this week’s packed data slate likely to support the case for a March cut, which remains my working assumption. It seems almost as if Pill is looking at a completely different economy to the rest of us judging by those remarks; or, as a fellow market participant put it to me on Friday, perhaps he’s inhabiting a completely different planet!
Rant over, back to markets, where it was a positive end to the week for stocks on both sides of the pond, albeit with US benchmarks outperforming, and with the rally again having a notable cyclical bent to it. Of course, conditions have been incredibly choppy over the last week or so as participants fret over concerns that progress in the AI space could upend business models in various sectors (e.g., software, real estate, financial services, logistics, etc.).
I must admit that those fears do seem somewhat overdone to me, not only considering how indiscriminate and extreme the downside in those areas of the market has been, but also taking into account the facts that we are both some way off this ‘disruption’ actually taking place (if it ever materialises), while there are also plenty of constraints in terms of memory, computing power, and data centre infrastructure to actually get any of these ‘disruptors’ off the ground at scale. Those constraints, of course, also represent opportunity, especially in the Energy and Industrials sectors.
I also find it rather amusing that the same perma-bears who a year or so ago were saying that the broader market will tumble because AI is a bubble, are now the same people claiming that the market will tumble because AI is going to take over the world. Without wishing to be too flippant, they were wrong then, and will probably be wrong again.
Zooming out, the fundamental bull case for risk assets remains a robust one. Earnings growth is still solid, economic growth is still robust, fiscal tailwinds are mounting, and the monetary policy backdrop is set to ease as the year progresses.
That said, it’s also noteworthy that spoos, for instance, have basically gone nowhere since last October, being stuck in a 400pt range since that time. This, to my mind, is more mechanical than anything else – as participants rotate out of tech, and into more cyclical areas of the market, the huge weight that tech names possess in benchmarks could well act as a cap at an index level. Comparing the YTD performance of the S&P 500, which is basically flat, and the equal-weighted S&P 500, which is up 5%, evidences this issue rather nicely.
As for markets elsewhere, metals struck a steadier tone as the week drew to a close, with spot gold reclaiming the $5,000/oz mark. The bull case here continues to hold water, with price continuing to be underpinned by both central bank buying and ongoing retail demand, though the broad $4,700/oz – $5,100/oz range that we’ve been in for a fortnight or so seems unlikely to break any time soon. I’d also flag, here, that with various Asia centres offline for Chinese New Year holidays this week, and with that having been the source of a significant amount of buying in recent months, some caution may well be prudent, at least in the short-term.
Treasuries, meanwhile, rallied across a modestly steeper curve, with the front-end unsurprisingly outperforming following the aforementioned January CPI report. This rally did pose a modest headwind to the dollar, though in all honesty the G10 FX complex was rather moribund all day, with recent ranges having been well-respected across the board.
In fact, I’ve probably lost count of how many times I’ve written that sentence over the last six months or so, with the DXY having been stuck in a narrow 4% range since last July. The whole ‘bye America’ trade hasn’t forced a downside break, while solid incoming US data hasn’t forced an upside one, largely as participants remain pre-occupied with the elevated policy volatility and general noise emanating from Washington DC.
Providing the volume on that front can be dialled down a bit, I’d wager that the ‘US exceptionalism’ case holds more water, though equally wouldn’t be banking on these turgid conditions changing any time soon. Short strangles are probably the play as a result.
LOOK AHEAD – With US desks away today, for Presidents’ Day, it could prove to be a somewhat subdued start to proceedings, though a busy week of calendar events awaits nonetheless.
‘Flash’ PMIs stand as the data highlight, even if we have to wait until Friday for those, while the end of the week will also bring our first read on Q4 US GDP, which will be watched very closely indeed in an attempt to gauge the extent of the damage that last year’s government shutdown may have wrought. Closer to home, it’s a pivotal week of data here in the UK, with the latest labour market report (Tues) set to show further slack emerging, and January’s CPI figures (Weds) likely to point to further progress having been made towards the 2% target, in turn opening the door to a BoE cut as soon as the March meeting.
Elsewhere, on the policy front, the RBNZ are set to stand pat on Wednesday, while both the RBA and FOMC release minutes from their most recent meetings this week. The latter, though, probably won’t give us many hints on the policy outlook, not least considering the Fed’s ongoing ‘wait and see’ approach.
Besides that, the usual handful of central bank speakers are due to pop up on news wires through the week, while the corporate reporting calendar is highlighted by Walmart’s figures on Thursday, as earnings season slows somewhat.