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Andreas Zanin
Analysis, Market Analysis | December 15, 2023

JASPER’S MARKET SQUAWK 15-12-2023

ECB, BOE Resist Dovishness

Stocks continued to rally on the Fed’s dovish stance, with futures indicating a higher chance of rate cuts starting from March compared to May. However, the rally lost momentum amidst overextension concerns. Over Europe, the ECB and BOE pushed back against early cut expectations, maintaining a high-for-long narrative.

Chart: EURUSD

Key Factors for Today

  • Fed’s Dovish Stance Fuels Rate Cut Speculation, Rally Overextended
  • Consumer Spending and Stable Labor Market Support US Growth
  • ECB Maintains Rates High, But Hints at End of Bond Purchases
  • BOE Holds Despite Recent Data, Cable Up on Cut Expectations Delay
  • Oil Prices Climb on Bullish IEA Forecast, Weaker Greenback
  • China Lowers Budget Deficit Amid Recovery Efforts, Offers Stimulus

Consumer Spending Defies Expectations

Retail sales surpassed expectations of a 0.1% drop in November to a 0.3% increase, with core also up 0.4%, supporting growth. In that vein, Atlanta Fed GDPNow raised its Q4 GDP projection to 2.6% from 1.2%. Initial jobless claims also dropped to 202K from the expected 220K, pointing to easing recession fears. Futures showed that the chances of rate cuts starting in March increased from around 40% to 77%, partially driven by major banks’ predictions of earlier cuts. The dollar’s fall continued unfettered, with the DXY down 0.80% on the day to 102, opening the door to 101 next unless bulls recapture 102.50.

EURUSD Over 1% Up After ECB Hints at End of Bond Purchases

The ECB maintained the 4% interest rate and hinted at reducing bond purchases by €7.5B per month from H2 of 2024 onwards. ECB’s Christine Lagarde said there has been no talk of rate cuts at all. However, weaker staff projections on GDP could lead to a rate cut before the Fed, in contrast to the higher-for-longer stance the bank portrayed. Three leading German economic institutes cut their 2024 economic growth forecasts while the government lifted a spending freeze a day after Germany’s government clinched a last-minute budget deal following weeks of tense talks. The EURUSD soared over 1% to $1.10, putting in a 4-day bullish strike but also met stiff resistance. Above there, resistance is expected at $1.1065, while support can be seen at $1.0924.

Sterling Jumps 1.20% on Delayed Cut Expectations

The BOE maintained a 5.25% rate despite recent data indicating a slowdown in wage growth and a GDP fall. The MPC was also unchanged, with three hawkish dissenters. Sterling jumped 1.20% as investors pushed back expectations of a first-rate cut to May from March despite the data shrug-off seen raising the prospect of a recession. Unlike the Fed, the BOE seems reluctant to signal cuts as it assumes interest rates will fall gradually. Governor Andrew Bailey said it was too early to discuss rate cuts. Cable revisited $1.28, where it faces resistance from profit-taking. If bulls can continue the push upward, the next level to watch is around $1.2836. Conversely, losing $1.2710 could see deeper pullbacks.

Oil Rises 2.60% on Bullish IEA Forecast, Weaker Dollar

Oil prices rose around 2.6% to $71.65 per barrel and are on track for their first weekly rise in two months. The move came after IEA’s bullish oil demand forecast for next year,coupled with a softer dollar. The IEA said that world oil consumption will rise by 1.1 million barrels per day in 2024, up 130,000 barrels per day from its previous forecast. Despite rising, WTI met resistance at the 20-Day WMA near $72.50 and received rejection. If pressure increases, $70 could flip to support.

China Lowers Budget Deficit Targets, Stimulus Flexibility

China plans to run a budget deficit of 3% of GDP in 2024 and issue special debt, lower than this year’s revised 3.8% target. The government said special sovereign bonds could be issued to provide flexibility for more stimulus, potentially amounting to 1 trillion yuan ($140.16 billion). Analysts expect China to maintain flexibility around its budget deficit to deal with economic underperformance. Declining property investment and missed retail sales growth estimates suggest the need for additional policy support. USDCNY reached a fresh June low of 7.10.

On The Docket

  • EA Manufacturing and Services PMIs
  • GB Manufacturing and Services PMIs
  • BOE Ramsden Speech
  • NY Empire State Manufacturing
  • Industrial Production
  • US Manufacturing and Services PMIs
  • BOC Gov Macklem Speech
  • European Council Meeting

FX 1-Day Relative Performance (USD)

  • Aussie 0.03% up, Kiwi down by 0.13%
  • Euro and Pound 0.05% and 0.0.6% down
  • Loonie 0.08% up, Franc a mere 0.01%
  • Japanese yen 0.19% in red territory
  • Gold 0.24% higher, Silver unchanged
  • Light and Brent Crudes up by 0.25%
  • Natural gas higher up, 0.63% in green

 

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