Weak economic data ran to the rescue of the equity bulls on Tuesday.
The Federal Reserve (Fed) President Jerome Powell will be thrown to the spotlight today, to potentially shoot a couple of doves down to the ground.
But there is always a hope that the falling price and wages inflation will get the Fed to the pivot point.
Weak wages inflation
January ended on a positive note, as the new set of economic data from the US helped investors brushing off the fear of a hawkish Fed.
The employment cost index, which is the Fed’s favourite gauge of wage inflation, slowed more than expected in Q4, to 1% from 1.2% a quarter earlier, compared with the 1.1% penciled in by analysts, and from the 1.4% peak announced for the Q1 of last year.
So, it is happening. US inflation is coming lower, and wages are growing slower – and other economic data, including the PMI indices continue pointing at a slowing economy, but without warning of recession.
In this sense, IMF also revised its growth outlook slightly higher for this year, and the Chinese reopening, along with the resilience of the US spending were the major reasons for the latest optimism.
As a result of weak economic data that helped the Fed doves get overt their Powell fear, the S&P500 rallied almost 1.50%, while Nasdaq jumped more than 1.50%.
What does Powell make of it?
The Fed is expected to raise its interest rates by 25bp today, but unlike Canada, the Fed will certainly not announce the end of the tightening cycle today.
Jerome Powell will certainly sound satisfied about the falling inflation and slowing wages, but he will likely point out that inflation remains high, risks to inflation remain to the upside, and that the job is not done yet.
He will surely push back the expectation of any rate cut this year.
Hawkish accompanying statement could boost the US dollar, and weigh on equities.
On the data front, the ADP report is expected to print a number below 200’000, while the JOLTS job openings will likely remain above 10 mio.
And that’s enough for the Fed to conclude that the jobs market is still too tight to stop tightening its policy.
In the FX
The US dollar failed to consolidate and extend gains as the weaker economic data keeps strengthening the Fed doves’ hands. While Powell could rectify sentiment and give a boost to the greenback today, gains in the dollar may not last long, and the dollar could see a strong top selling for a deeper downside correction toward the 100 mark.
The EURUSD eased as low as 1.08 yesterday, but the pair found buyers on the back of a strong looking GDP data from the Eurozone. The zone grew 0.1% last quarter, versus the 0.1% contraction expected by analysts. The headline figure was good, but the fact that German growth slowed, and the growth surprise was mostly explained by tax avoidance in Ireland still left a metallic taste in investors’ mouths.
Anyway, that will certainly not change the European Central Bank’s (ECB) decision to hike by 50bp this week. Whether a 50bp hike will be enough to send the EURUSD to 1.10 depends on what Jerome Powell will say, however.
Elsewhere, today’s PMI data from China, released by Caixin, were not as rosy as the one compiled by China Federation and released yesterday. The Caixin manufacturing index remained in the contraction zone, and more importantly, the slowdown was faster than the market expectations. Meaning that the Chinese manufacturing contracted more than what analysts expected. But again, give it some time! The period into the Chinese New Year is always a bit depressed in China.
American crude tipped a toe below the 50-DMA yesterday, as the API data revealed another big build in US inventories last week. US inventories grew by more than 6 mio barrels last week. Gasoline inventories rose by almost 3 mio barrels.
The more official EIA data is due today, and the expectation is a 1 mio barrel decline, leaving room for further weakness in oil prices.