By Craig Erlam
US economic data was surprisingly strong on Wednesday, with both the services and manufacturing PMIs comfortably exceeding expectations and reinforcing the message that the economy is in good shape, even getting better.
Of course, these are just surveys and can be volatile, but the fact that both jumped as much as they did and both are now in growth territory is very promising. However, it may be slightly concerning for the Federal Reserve if it is concerned about the strength of demand.
BoC cautious on rate cut talk
The Bank of Canada left interest rates unchanged at the January meeting and signalled it isn’t yet ready to consider rate cuts.
That’s aligned with the message we’re getting from other central banks but also what is to be expected until policymakers are absolutely convinced it won’t backfire, at which point they’ll probably start cutting quite quickly.
The stickiness of core inflation is clearly the key issue here as it and the headline figures are only a little above target. The difference is that progress appears to have stalled which will naturally make policymakers nervous.
Markets now expect a rate cut later in the second quarter to allow time for it to fall further and only 100 basis points in total this year.
Weak economy could aid ECB on rate cuts
The data from the eurozone isn’t improving early in the new year, with the latest PMI surveys all remaining firmly in contraction territory.
While we continue to see improvements in the manufacturing survey, that comes from a very low base and still some way from the 50 threshold that separates growth from contraction. And it doesn’t appear on course to breach that threshold any time soon.
The services sector is arguably more problematic, as it’s a far more important segment of the economy and it’s showing little sign of recovering.
This may aid the case for the ECB to consider cutting rates in the coming months if demand remains soft and the economy is either in or on the brink of recession.
But we’ll need to see more evidence of that over the next six weeks to make March a live prospect. Assuming, of course, inflation doesn’t enable that all on its own.
Oil consolidation continues
Oil prices continue to consolidate, with Brent crude now trading not too far from $80 a barrel, but also not looking like imminently bursting higher.
Geopolitical risk and the threat of delays and disruption are causing some alarm, but that’s not being particularly reflected in the price at this stage.
That the market is pulling back less and less in recent weeks could be indicative of traders becoming more apprehensive, but it’s not clear whether that will translate to higher prices and if so, to what extent.
Gold holding above $2,000
Gold has been quite choppy over the last four sessions, but ultimately hasn’t moved very far.
It continues to trade above $2,000, perhaps a sign that traders remain confident that central banks will be forced to cut rates soon and on multiple occasions throughout the year.
But that is far from certain at this point and its resilience above here may be tested over the coming weeks if the data doesn’t deliver, as it did in the final couple of months of last year.
Potential bearish reinforcement in bitcoin
Bitcoin is trading just below $40,000 and testing it as a potential new area of resistance having broken below here only a couple of days.
That was a big psychological blow and a move straight back above could go some way to repairing the damage.
A failure on the other hand could reinforce the initial bearish signal.
Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA
Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.
