The new year kicks off with a bang as top tier US and eurozone economic data point to a busy and volatile first week. Hopes are (too?) high that major central banks will begin cutting interest rates soon, with the Fed pivot expected to play out in March. Money markets see above an 80% chance of a 25bp rate cut at that FOMC meeting and around 150bps of total easing for the year. Euphoric stock markets are near record highs and will be tested by the upcoming economic releases.
While falling inflation is expected to continue, the Fed’s other mandate – employment – will likely become increasingly important over the next few months. Friday’s marquee non-farm payrolls data is expected to show that job growth continues to slow. But companies aren’t laying off employees in big numbers which is allowing wages to rise at a moderate pace.
This is crucial for the “Goldilocks” scenario which has supported risky markets over the last few months. Very strong job gains or a sudden drop in employment could shake investors’ confidence in the soft landing theme. All three major US stock market indices are currently in overbought territory. The market’s fear gauge, the VIX index, hit more than three-year lows last month.
The FOMC minutes and ISM data points for manufacturing and services will add further colour in the week and may cause volatility in the dollar. After its rollercoaster ride in 2023, the greenback finished the year with losses of around 3% against a basket of currencies. Falling Treasury yields, on heightened expectations of aggressive rate cuts, will probably need to continue to see another down leg in USD for now.
Eurozone inflation will be in the spotlight as well on Friday with contrasting figures forecast. The headline will snap a sharp drop which saw it undershoot expectations for three consecutive months. This will be largely down to government energy support measures meaning a lower “base” to which December 2023 prices are compared. However, the core numbers should carry on falling which will assuage the ECB hawks.
Here are the major data releases of the week:
