Friday’s economic data was yet another proof of the diverging fortunes between the US economy and the rest of the developed world.
In the morning, the UK announced that its retail sales slumped for the second straight year, fueling the worries of a mild recession in the UK this year. But in the afternoon, Michigan’s consumer sentiment index showed an advance to a more than two-year high, the expectations improved more than expected, with falling inflation expectations as a cherry on top.
Remember, the US retail sales also showed a shiny number for the past holiday season.
The prospects of Federal Reserve (Fed) rate cuts and the likely scenario of soft landing hint that there is a growing chance that we see the US 10-year yield go back to where it belongs – above the 2-year yield.
Right now, the US 2-year yield stands near 4.40%, the 10-year yield advanced past 4.10%, and the US dollar has been unable to clear the 200-DMA last week, but the strong US data versus weak data from the rest of the world would justify a swift move above this 200-DMA and the US stocks – especially the US technology stocks continue to fly high in the first month of this new year.
The S&P 500 finally hit an ATH level last Friday. Nvidia (NASDAQ:NVDA) extended its gains to a fresh record as well, thanks to Meta’s announcement that it will be buying 350’000 cutting-edge chips from Nvidia to power its AI systems. Some estimate that Meta’s purchases will ensure around $10bn revenue this year for Nvidia from Meta (NASDAQ:META) alone.
Overall, strong US economic data has been tempering the expectation of a March rate cut from the Fed. But the Fed is still broadly expected to cut in May, if it doesn’t in March. The US yields are drifting gently higher from last year’s end levels. The rebounding yields weigh heavier on the S&P493; the equal-weighted index continues to underperform the Magnificent 7.
The earnings season continues full swing with Netflix (NASDAQ:NFLX) and Tesla (NASDAQ:TSLA) due to announce their latest quarterly results this week.
The week’s economic calendar is also busy with major central bank meetings including the Bank of Japan (BoJ), the European Central Bank (ECB) and the Bank of Canada (BoC).
The BoJ will not normalize rates this week. In the best-case scenario, it will give further hints regarding the timing of the first rate hike – perhaps April.
More realistically, the Japanese policymakers will push back on the normalization expectations and say that the monetary policy in Japan will remain supportive for as long as needed. The USD/JPY opened the week near the 148 level. The risks are tilted to the downside as the risk of a verbal intervention increases into the 150 level.
The ECB and the BoC will certainly keep their rates unchanged, but the nuance in their accompanying statement will be closely watched for any hints regarding the first rate cut. ECB Chief Lagarde said last week in Davos that the ECB could lower rates by or in summer. The EUR/USD is flirting with the 1.09 level this morning. Any hint that the ECB is ready to cut rates will weaken the euro bulls’ hands for a sustainable rise above the 1.10 level.