Stock indices were pressured by Powell’s comments. German inflation retreats

As expected, the FOMC maintained the target range for the federal funds rate at 5.25%-5.50% and stated that the risks to employment and inflation targets are becoming more balanced. The FOMC removed mention of possible additional policy tightening but declined to immediately ease monetary policy, saying it did not believe it was appropriate to lower the target range until there was greater confidence that inflation was moving steadily toward 2%. During the press conference, Powell said a rate cut in March was not a base scenario and reiterated a commitment to keep rates at current levels. Markets are discounting the odds of a 25 bps rate cut at the March 19-20 FOMC meeting at 37% and fully discounting (100%) the probability of the same 25 bps rate cut at the April 30-May 1 meeting. Investors now await the weekly jobless claims and PMI reports from ISM on Thursday and the much-anticipated monthly employment report on Friday.

German Consumer Price Index for January (EU harmonized) declined to 3.1% y/y from 3.8% y/y in December, better than expectations of 3.2% y/y. Germany’s January unemployment change unexpectedly fell by 2,000, indicating a stronger labor market than expectations of an 11,000 increase. The unemployment rate for January was unchanged at 5.8%, indicating a stronger labor market than expectations of 5.9%. German retail sales for December unexpectedly fell by 1.6% m/m, weaker than expectations for a 0.6% m/m increase.

ECB Vice President Gindos said that inflation has been delivering mostly positive surprises lately and will be slightly lower than the ECB’s forecast. Swaps estimate the odds of a 25 bps ECB rate cut at the next meeting on March 7 at 23% and fully discount (103%) the same rate cut at the next meeting on April 11.

Silver prices came under pressure on Wednesday amid weaker-than-expected reports on Chicago’s PMI and China’s manufacturing PMI for January, a negative for industrial metals demand.

WTI crude futures rose above $76 a barrel on Thursday, recovering some of the previous session’s losses amid an improved demand outlook. The IEA executive director recently said that global oil demand is likely to grow by 2 million barrels per day in 2024, well above the previous forecast of 1.24 million barrels per day. Prospects for lower interest rates in major economies and a series of stimulus measures in China, a major oil importer, have also boosted the demand outlook. OPEC+ representatives will meet online today. No changes in production are expected, but we should always be ready for surprises.

Asian markets traded mixed yesterday. Japan’s Nikkei 225 (JP225) gained 0.74%, China’s FTSE China A50 (CHA50) added 0.52%, Hong Kong’s Hang Seng (HK50) was down by 1.39% on the day, and Australia’s ASX 200 (AU200) was positive by 0.12%.

China’s Caixin manufacturing PMI unexpectedly jumped to 50.8 in January 2024, matching December’s reading but exceeding market forecasts of 50.6. It was the third consecutive month of rising factory activity, contrasting with official data that indicated prolonged weakness.

Japan’s Consumer Confidence Index for January rose by 0.8 to a 2-year high of 38.0, exceeding expectations of 37.5. Japanese industrial production for December rose by 1.8% m/m, weaker than expectations of 2.5% m/m. Retail Sales in Japan for December unexpectedly fell by 2.9% mom, weaker than expectations of 0.2% mom and the biggest decline in 3 years. A summary of the BoJ’s January 22-23 policy meeting said policymakers are getting closer to raising interest rates for the first time since 2007. A BoJ official indicated that conditions for a policy review, including an end to the negative interest rate policy, are being met. Swaps estimate the odds of a 10 bps rate hike from the BOJ at 24% at the next meeting on March 19 and 80% at the April 26 meeting.

Indonesia’s annual inflation rate eased to 2.57% in January 2024 from 2.61% in December, compared with expectations of 2.55%, approaching the midpoint of the central bank’s target of 1.5 to 3.5% for 2024.