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Japan saw a modest improvement in labor cash earnings in labor cash earnings, which increased by 1.0% yoy, accelerating from November's 0.7% gain. Despite this uptick, the growth fell short of anticipated 1.3% yoy.

A notable positive development was observed in regular pay, which rose by 1.6% yoy, marking the highest reading since May 2023. Additionally, special payments saw a marginal increase of 0.5% yoy, although overtime pay experienced a decline of -0.7% yoy.

With CPI standing at 3.0% yoy, real wages saw a decline of -1.9% yoy, albeit at a slower pace compared to -2.5% yoy observed in the previous month. This marks the slowest decline in real wages since June 2023, suggesting a slight easing in the pressure on household incomes.

However, this positive note is tempered by the latest household spending figures, which saw a -2.5% yoy drop, worse than the expected -2.1% yoy.

BoE Chief Economist Huw Pill highlighted, in an online event overnight, a shift in BoE's monetary policy discussions, which has evolved to determining "when" rather than "if" it will be appropriate to commence reductions in the Bank Rate.

Pill pointed out that rate reductions is currently "premature." However, he suggested that the Bank does not require inflation to fully revert to its 2% target before easing monetary policy, given its current restrictive stance.

The Chief Economist also cautioned that due to developments in the Middle East, inflation is slightly more likely to "surprise on the upside than the downside" over the next year to 18 months. This perspective justifies to "to maintain restriction in the economy for some time". This scenario would warrant maintaining "for longer" or even increasing the restrictive nature of monetary policy to combat "second round effects".

Yet, Pill also left room for optimism, suggesting that if inflation dynamics dissipate more quickly than anticipated, there could be scope for more rapid interest rate reductions.

• CADJPY reversed from resistance level 110.30
• Likely to fall to support level 109.00

CADJPY currency pair recently reversed down from the key resistance level 110.30, which has been reversing the pair from the middle of November.

The resistance level 110.30 reversed the pair multiple times from last month.

Given the strength of the resistance level 110.30 and the strengthening yen gains, CADJPY currency pair can be expected to fall further to the next support level 109.00.

• EURGBP reversed from support level 0.8515
• Likely to rise to resistance level 0.8600

EURGBP currency pair recently reversed up from the key support level 0.8515, which has been reversing the pair from the middle of last year.

The support level 0.8515 was strengthened by the lower weekly Bollinger Band.

Given the strength of the support level 0.8515 and the oversold weekly Stochastic, EURGBP currency pair can be expected to rise further to the next resistance level 0.8600.

The ISM Services PMI jumped to 53.4 in January from 50.6 in December, comfortably beating the 52.0 consensus expectation. Ten industries out of 18 reported growth for the month – up from nine in December.

The business activity sub-index was unchanged at 55.8, while the new orders index rose to 55.0 from 52.8 in December.

The prices paid component jumped 7.3 percentage points (pp) to 64.0. The supplier deliveries sub-index rose to 52.4, the highest print since November 2022, and indicates longer delivery times compared to December.

The employment sub-component flipped to signaling growth, as it jumped 6.7 pp to 50.5.

Key Implications

Well, a healthy print from the services sector today. At 53.4, the index shows the sector continues to grow at a healthy clip, with new demand growth reaccelerating again in January. Moreover, the recovery in employment growth suggests December's contractionary reading was an outlier rather than a structural shift.

After Friday's gangbusters payrolls report showed 289k new jobs in the private services sector, today's ISM doesn't come as much of a surprise. If anything it only confirms what we already knew – the U.S. economy continues to chug along and show remarkable strength given the interest rate backdrop. Looking forward, eyes should be focused on whether the uptick in input price inflation is sustained and whether it feeds through to consumers.

Markets:

The payrolls-Powell combo resonated through today’s European trading session in absence of other data/events. It put core bonds under further pressure from the start with US Treasuries underperforming German Bunds. Recall that Powell ruled out a March rate cut with the voiceover of the 60 Minutes interview on CBS suggesting that the Fed will only pull the trigger on rates by the middle of the year (June?!). Despite the significant two-day correction, US money markets are still discounting a 60% probability to a May move with cumulative 2024 rate cuts to the tune of almost 125 bps despite Powell confirming an unaltered FOMC view of 75 bps. Comments by Minneapolis Fed Kashkari strengthened the market pulse. He wrote in an essay that the neutral rates possibly rose during the post-pandemic recovery. It gives the FOMC time to assess upcoming economic data before starting to lower its policy rate with less risk that too-tight policy is going to derail the economic recovery. Policy may not be as tight as assumed given the low neutral rate environment that existed before the pandemic. In the December 2023 FOMC dot plot, 7 out of 18 governors indicated that the neutral rate could be above the 2.5% consensus view in place since mid-2019. The January US services ISM dealt a final blow to US Treasuries. The ISM rebounded more than expected (53.4 from 50.5 vs 52 expected). Details showed first employment growth since November (50.5), accelerating new orders (55) and a rapid increase in prices paid (64 from 56.7). US yields at the time of writing add 10 bps (2-yr) to 14 bps (10-yr). EUR/USD is testing 1.0724 support.

UK Gilts underperform German Bunds as well today. The UK Office for National Statistics announced that it will be reinstating from next week reweighted Labour Force Survey estimates. They incorporate latest views on the size and composition of the UK population and replace experimental estimates in place since October 2023. Under the new data, the UK unemployment rate was 3.9% in the three months through November compared to the previous estimate of 4.2%. From a dynamic point of view, the unemployment rate now shows a declining path since Summer compared with the previous more flattish shape. The outcome suggests that the UK labour market remains more tight than expected with the risk of more upward pressure on growth and (wage) inflation. It complicates the picture for the Bank of England and argues in favour of delaying a potential first rate cut. Sterling initially profited from the rate support against an ailing euro, but GBP/USD losing the bottom of its sideways trading channel (1.26) eventually helped the (EUR/GBP)-pair back towards 0.8550.

News & Views:

Turkish inflation accelerated more or less as expected by 6.7% M/M and 64.86% Y/Y in January, from 2.93% M/M and 64.77% Y/Y in December. Only “clothing and footwear” showed a monthly price decline (-1.61%). A core inflation gauge excluding unprocessed food, energy, alcoholic beverages, tobacco and gold rose by 6.85% M/M and 67.68%. Y/Y. A big increase in the minimum wage, price adjustments at the start of the year and the ongoing TRY-depreciation were important drivers of the inflation acceleration. Last month, the CBRT raised its policy rate by 2.5% to 45% while suggesting that the hiking cycle is over with the current rate being sufficient to bring inflation back under control. High domestic/services-related inflation poses an upside risk to outlook. Thursday’s quarterly inflation report of the central bank offers more guidance on the central bank’s intentions.

The OECD upwardly revised its global growth outlook to 2.9% from 2.7% in November. This still means a slowdown compared with expected growth of 3.1% for 2023. The picture diverges across countries with strong growth in the US and many emerging market economies offset by a slowdown in most European countries. Annual GDP growth in the US is projected to remain supported by household spending and strong labour market conditions, but moderate to 2.1% in 2024 and 1.7% in 2025. EMU GDP growth is projected to be 0.6% in 2024 and 1.3% in 2025, with activity held back by tight credit conditions short term before picking up as real incomes strengthen. Chinese growth is expected to ease to 4.7% in 2024 and 4.2% in 2025, despite additional policy stimulus, reflecting subdued consumer demand, high debt and the weak property market. Headline inflation in the G20 economies is projected to drop from 6.6% in 2024 to 3.8% in 2025, with core inflation seen easing to 2.5% in 2024 and 2.1% in 2025.

The US dollar has seen a significant increase in strength against the Euro, with the EUR/USD pair falling to 1.0770 by Monday morning. This movement is largely attributed to the recent release of robust employment sector reports in the US for January, which have shifted investor expectations regarding the Federal Reserve's interest rate decisions.

The Nonfarm Payrolls (NFP) report for January revealed an impressive increase of 353 thousand jobs, far exceeding the anticipated 187 thousand. Additionally, December's NFP figures were revised upwards to 333 thousand. Average hourly earnings also saw a notable rise of 0.6% month-over-month, doubling the forecast. These indicators suggest mounting inflationary pressures, potentially complicating the Federal Reserve's plans to normalize interest rates.

The latest employment data effectively solidified market projections, especially after Federal Reserve officials indicated that a rate cut in March was unlikely, with adjustments possibly being postponed until May.

EUR/USD Technical Analysis

The H4 chart analysis of EUR/USD indicates that a corrective wave reaching 1.0896 has concluded. The market is now in the midst of a downward trend aiming for 1.0722. Upon achieving this target, a potential corrective movement to 1.0808 might occur, serving as a test from below, before the trend resumes its descent towards 1.0682. This outlook is supported by the MACD indicator, which is positioned below zero and indicates a continued downward trajectory.

On the H1 chart, the EUR/USD pair has established a consolidation range around 1.0808. Following a downward breakout, the declining wave is expected to proceed towards 1.0722. After reaching this milestone, a correction back to 1.0808 could be anticipated. The Stochastic oscillator, with its signal line currently above 50, suggests a potential climb to 80 before a decline to 20, reinforcing the bearish scenario outlined.

US ISM Services PMI marked a significant uptick from 50.6 to 53.4 in January, above expectation of 52.1. This highlights a strengthening in the services sector

A closer look at the index components reveals stable business activity level, with the production sub-index holding steady at 55.8. New orders rose from 52.8 to 55.0, indicating growing demand for services.

A remarkable aspect of this month's report is the sharp rebound in employment, which soared from 43.8 to 50.5, signaling a return to expansion territory. This significant leap, the largest month-over-month increase since January 2021. Comments from respondents include: "Ramping up head count as projects come on line" and "Highly competitive market due to salary, demand and turnover."

Inflationary pressures within the sector also intensified, with the prices index jumping from 56.7 to 64.0, marking the most considerable month-over-month increase since August 2012.

Historically, January's reading of 53.4% is indicative of 1.5% annualized growth in real GDP.

Full ISM services release here.

Minneapolis Fed President Neel Kashkari argued in an essay that Fed's current monetary policy stance "may not be as tight as we would have assumed". This would afford Fed valuable leeway to sift through incoming economic data before deciding on any reduction to the federal funds rate. More importantly, that's "with less risk that too-tight policy is going to derail the economic recovery".

Kashkari pointed out a dual phenomenon observed since September: Swift decline in inflation rates alongside a "remarkably resilient" economic growth, which even accelerated in the latter half of 2023. This trend challenges the conventional expectation that tight monetary policy, aimed at curbing inflation, would necessarily result in weakened economic growth and labor market conditions, including spikes in unemployment.

"But that is not what we have experienced in recent quarters," Kashkari observed.

He suggests that the decrease in inflation may be largely attributed to improvements on the supply side, which have enhanced production capabilities and helped realign supply and demand, thus mitigating inflationary pressures.

Full essay of Fed Kashkari here.