In the session last Friday, US PCE deflators and spending data were near consensuses, as was expected after the Q4 GDP release earlier that week. The final figures from University Michigan consumer confidence showed an upward revision to inflation expectations for the one year (3.9% from 4%) and the five to ten years (2.9% from 3%).
Market thinking/repositioning stayed the same going into this crucial week with Fed, BoE, and ECB policy meetings. The US yield curve changed by +1.9 basis points (2-yr) and -1.9 basis points (30-yr). The belly of the curve underperformed the wings by 2.8 basis points, with the 10-year yield spread widening to 2 basis points, while Italy underperformed (+4 basis points). EUR/USD held within its extremely narrow weekly range (1.084-1.092) with a weekly close of 1.0868. Last week, the pair failed to break through the 1.0942 resistance (50% retracement on a decline from 2021-2022).
This week will be the litmus test for EUR/GBP, which closed at 0.8774. However, the resistance zone around 0.88 will be tested this week, just as for EUR/USD. The high 0.88 resistance zone was held earlier this month, but the rationale is the same as for EUR/USD: the real test will follow this week. The US and European stock markets closed Friday with marginal gains, while Nasdaq was another exception (+1%).
As Chinese markets return from the Lunar New Holiday, they are relatively flat. Core bonds and EUR/USD are no longer trading. After an expert panel urged the central bank and government to revise their joint policy statement to make inflation a longer-term goal, the yen has strengthened (USD/JPY 129.50). During the meeting, one of the members, who is also being considered for a deputy BoJ governor position in Spring, explained that monetary policy would need to be rethought comprehensively once yield functions and bond markets normalized. As a result of the episode, the BoJ is again under pressure to end its decade-long monetary stimulus program.
It was a dull week last week, with barely any big catalysts and choppy price action, but this week will be the opposite. The FOMC, major central bank policy decisions, and plenty of economic reports are likely to drive the market.
At the moment, the “soft landing” narrative dominates the scene with moderation in inflation and a resilient labor market, which has led to a loosening of financial conditions.
For Tuesday:
In Q4, the Employment Cost Index (ECI) is expected to decrease from 1.2% in Q3 to 1.1%. Fed officials and markets are watching wage inflation, but as data showed a moderation in wage growth in the past months, the risk of a wage-price spiral subsided. Because the labor market is the main topic of concern at the moment, the consumer confidence index in the US is worth a look, which correlates with the unemployment rate and tends to forecast changes in employment a couple of months in advance.
