Sat, Feb 04, 2023 @ 12:53 GMT
HomeContributorsFundamental AnalysisWeekly Focus - Markets Are Rallying But Is It Premature?

Weekly Focus – Markets Are Rallying But Is It Premature?

Year 2023 has delivered for risk lovers thus far. Early signs of moderating core price pressures in the US, Chinese reopening and a mild winter in Europe are altogether positive signals for risky assets in short term. The problem is that a premature easing in financial conditions risks upholding underlying price pressures, and central banks are by no means out of the woods as they aim to make sure that the current price pressures are tamed for good. The ECB particularly finds itself in a tricky position as core inflation has kept rising, and soon, pent-up demand from China could create new inflationary concerns. See our Euro Macro Notes – The China connection: short-term boost, long-term worry, 12 January.

The sudden change of fortunes has driven a substantial outperformance in European equities vs the US over the last 2-3 months. European equities have gained 13% since the start of November compared to only 3% in the US. Meanwhile, EUR/USD has continued to tick higher, breaching 1.085 this week. We are in the process of updating our EUR/USD forecast, and while we still see fundamentals favouring USD in 6-12 months horizon, it is difficult to pinpoint a trigger for a near term reversal.

This week, US December CPI came out close to our and consensus expectations, but the details suggest underlying price pressures could be starting to moderate. Core services inflation picked up to 0.5% m/m (from 0.4%), but the uptick was driven by higher shelter and health care components, while the most wage-sensitive components showed easing price pressures. We have updated our call and we now expect Fed to hike by 25bp (was 50bp) in February. We continue to think that easing financial conditions, less negative growth outlook and economic recovery in China create persistent inflation risks, and still think the Fed will eventually hike the policy rate to 5.00-5.25% in May (prev. March). See US Labour Market Monitor, 11 January and Global Inflation Watch – Central banks welcome easing inflation, 13 January, for our latest thoughts on inflation developments.

Next week, we get Q4 GDP data from China on Tuesday morning, which is expected to drop 1% q/q due to the negative lockdown effects in November and covid surge in December. We also get industrial production, retail sales, investments and unemployment for December, which will most likely look very weak. The negative numbers should be followed by a faster-than-expected rebound during H1, though, as the positive reopening effects come through.

In the US, December PPI, retail sales and industrial production data are all released on Wednesday. Retail sales is the most important of the bunch, as it will be the first piece of hard data for December, and will give us a sense of if the sharp slowdown illustrated by the ISM services actually took place. The FOMC blackout will begin on the 21st, and investors will keep an eye on any last minute commentary.

In the euro area, we have ZEW expectations for January due on Tuesday and ECB minutes on Thursday. In the former, it will be interesting to see whether the recent rebound in leading indicators persists into Q1. In the latter, we look out for more details surrounding the upcoming balance sheet normalisation (QT) and how much more ‘significant’ interest rate increases the Governing Council has in mind in light of the inflation outlook.

Full report in PDF.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
This publication has been prepared by Danske Markets for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Markets´ research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S, which is regulated by FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright (©) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

Featured Analysis

Learn Forex Trading