Rise in Treasury yields knocks stocks off more record highs
* US business activity picks up in January as inflation seen cooling
* BoC leaves rates unchanged, frets about core inflation’s persistence
* Tesla Q4 results miss estimates, shares slump, but tech drives index gains
* ECB to hold rates as market debates rate cut timeline
FX: USD failed to build on its bullish momentum on Tuesday. Prices dipped below the 50-day SMA at 102.85 but they did pull back as Treasury yields neared recent cycle highs. The first quarter is historically positive for USD, with January typically the best month. Focus turns to today’s data including GDP, initial jobless claims and durable goods. That comes after better-than-expected PMI figures that showed manufacturing returned to expansionary territory.
EUR popped up to a high of 1.0932 before pulling back. PMIs showed very tentative signs of bottoming out. But the data still showed the zone firmly in stagnation. It also highlighted higher prices in the services sector and as yet, no uptick from the Red Sea supply disruption events. All eyes turn to today’s ECB meeting. Any talk of rate cuts will be seized upon.
GBP climbed higher before giving back some gains late on, as PMI data generally beat market expectations. The data pointed to a brighter growth outlook but still stubborn inflation. Money markets now price in less than 100bps of easing for this year. This was above 150bps in December.
USD/JPY sold off below the 100-day SMA at 147.50 to 146.65 before paring losses. A weak close would have negated the bullish consolidation pattern that had been building over the last few sessions.
AUD showed little reaction to the bank reserve cut in China. The aussie continues to trade around the 200-day SMA at 0.6577. USD/CAD moved higher above its 200-day SMA at 1.3482. The BoC meeting was pretty much as expected. Policymakers held rates at 5% for a fourth straight time with a cautious outlook and continued concern about sticky inflation. It wants to see a further slowing before rate cuts.
Stocks: US equities closed mixed as momentum from the PBoC’s rate cut was trumped slightly by rising Treasury yields and strong PMI. The benchmark S&P 500 advanced 0.08% to settle at 4,868. The tech-laden Nasdaq 100 added 0.55% to finish at 17,499. The Dow Jones underperformed again closing 0.26% lower at 37,806. This was the fourth straight record close for the broad-based S&P 500. Gains were led by tech with Microsoft crossing $3trn market cap, only the second company to do so after Apple. Meta rose above $1trn, and both were fresh records. The Mag 7 are back in the leadership role and driving indices. But Tesla missed Q4 revenue estimates on weak auto sales, reporting results after the close. The EV maker registered its first annual profit decline in 2023 since 2017. EPS dropped 23% from a year ago with the company also projecting slower growth in 2024. The stock price is down over 3% in after-hours.
Asian futures are mixed. APAC stocks traded mixed on Wednesday after the similar lead from Wall Street. Earnings, a hawkish BoJ tone and Chinese support pledges added to the mix. The Hang Seng outperformed and has bounced roughly 7.5% in two days. But the mainland was choppy as it tried to bounce more strongly off five-year lows. The Nikkei 225 sold off amid higher Japanese yields after hawkish Ueda comments.
Gold struggled with higher Treasury yields, even though the dollar sold off. US business activity picked in January while it is hoped China will soon announce a support package to stem the persistent negative sentiment in their stock markets.
Day Ahead – ECB, US GDP
President Lagarde is expected to reiterate what she said last week in Davos. That is, it is too early to discuss rate cuts and the bank remains data dependent. If she does veer into guidance, summertime is the likely timing for policy easing. Key data will be available by June, including wage growth figures. The current disinflation trend is also expected to get closer to the 2% target, with yesterday’s PMIs remaining in stagnation territory.
The first estimate of Q4 US GDP is forecast to show 2% growth. But it could be the sixth consecutive time that consensus underestimate momentum. The Atlanta Fed GDPNow estimate is tracking 2.4%. This was recently revised higher from 2.2%, due to recent stronger retail sales and industrial production data. Weekly initial jobless claims figures should also be watched. Last week saw numbers close to one-year lows, highlighting ongoing labour market tightness.
Chart of the Day – EUR/USD holding above 200-day SMA
Tuesday’s drop through recent lows and the 200-day MSa at 1.0844 looked bad for the euro. But buyers stepped in to close just above this area. Yesterday saw prices move above the 50-day SMA at 1.0921 beofre pulling back as US Treasury yields ticked higher.
There are around 132bps of easing priced in to the European curve and its near enough a coin toss for an April rate cut. Lagarde will have to be careful not to reignite market bets for more easing, which stood above 160bps after the last ECB meeting.