The End Of A Tumultuous Week

WHERE WE STAND – Finally, the end of a long and tumultuous trading week. In true Friday spirit, I’ll try to keep things short and sweet this morning.

Despite another deluge of catalysts, trade was a little calmer yesterday, with participants by and large digesting developments with relative ease.

The ECB, as expected, and had been fully discounted by money markets, delivered a 25bp deposit rate cut, marking the fifth reduction this cycle. Further such cuts remain on the cards, with President Lagarde having noted that policy remains in restrictive territory, and that it is “premature” to begin discussions on when, and where, to conclude the easing process.

My base case remains that the ECB deliver a 25bp cut at the next meeting in March, and likely continue cutting at that pace for the foreseeable future, until the deposit rate approaches a neutral level at around 2%. Cuts below are likely later in the year, as downside growth risks mount, and the probability of sustainably undershooting the 2% inflation target rises. That said, with the EUR OIS curve already discounting around 55bp of further easing this year, substantial EUR downside on a dovish ECB policy path seems unlikely.

Across the pond, yesterday’s deluge of US data was somewhat mixed.

The economy grew 2.3% on an annualised QoQ basis in the final three months of 2024, considerably below the 2.7% consensus, albeit a figure that continues to represent a solid pace of economic expansion. Pleasingly, the details of the report were optimistic, with consumption having risen 4.2% on the quarter, pointing to the consumer spending outlook remaining rosy, which in turn should continue to underpin a solid clip of economic expansion in early-2025.

Meanwhile, the weekly jobless claims figures were better than expected. Initial claims rose 207k in the week to 25^th January, a 4-week low, while continuing claims rose 1.858mln, also below expectations, with the latter print coinciding with – and boding well for – the January NFP survey week.

From a market perspective, neither of those events moved the needle especially much, with modest USD downside on the GDP print paring relatively rapidly, likely a result of the aforementioned underlying metrics within the release pointing to a continuation of the ‘US exceptionalism’ theme. This, incidentally, should also see the path of least resistance for equities continue to lead to the upside, even if the strike price of the ‘Fed Put’ is now considerably lower than it was last year, after a hawkish ‘skip’ at the January meeting.

On that note, ‘magnificent seven’ earnings continued yesterday, with Apple (AAPL) releasing Q4 figures. Earnings beat expectations on both top- and bottom-lines, though performance in China remains concerning, and could exert further pressure on the stock in coming quarters as a recovery in fortunes in the world’s second largest economy remains elusive.

Finally, gold continues to glimmer, with the yellow metal having rallied to fresh record highs yesterday, surpassing the prior peak set last October. Not only is momentum still firmly with the bulls, supportive EM central bank flows, coupled with lingering haven demand amid ongoing political and geopolitical uncertainties leaves the balance of risks tilting firmly towards further gains.

LOOK AHEAD – A few notable events lie ahead as the weekend draws near.

Stateside, December’s PCE inflation figures are likely of most interest, though the Core PCE deflator is fully expected to have risen 2.8% YoY as 2024 came to a close, with Fed Chair Powell having strongly hinted at such an outcome during Wednesday’s press conference. Other prints due from the US today include Q4’s employment cost index, as well as January’s Chicago PMI survey.

Elsewhere, German flash CPI figures might attract some attention, ahead of the eurozone-wide inflation figure due early next week, while November’s Canadian GDP growth figures are too stale to worry about.

Speaking of Canada, weekend gapping risk is elevated into Monday’s market open, given the previously mooted 1^st February date for President Trump to impose a 25% tariff on Canadian and Mexican imports. Markets don’t appear to have adequately discounted this threat, and significant CAD and MXN downside will be seen at the re-open if said tariffs are indeed imposed as threatened.