What did last week give the financial markets in terms of prompts regarding the macroeconomic situation? Far less than the previous week, which was packed full of major central bank decisions, but still enough to re-ignite fears of recession, sticky inflation, and further monetary tightening. There were speeches and comments from officials of all the major central banks, which pointed to greater concerns about inflation than activity. Indeed, the European Central Bank and Federal Reserve officials appeared to harden their stance towards such an outcome. 

Data though was less supportive, with German industrial production slumping in December, and the UK Q4 and December GDP (Gross Domestic Product) pointing to a sudden loss of activity late in the quarter, which meant overall the economy stagnated versus Q3. The fears of the scale and length of any recession amongst UK authorities appear to have lessened in recent weeks, but is that wise? Although these figures were no doubt negatively affected by industrial disputes, the weakness was also most likely as a result of the cumulative effect of interest rate hikes, the squeeze on incomes from energy and food price rises, and the upcoming belt tightening from companies and individuals as fiscal policy becomes more of an economic drag. None of the newsflow from last week had a huge effect on market sentiment, but perhaps that was also telling, given how sentiment had shifted post the central bank meetings?

After the jump in the US dollar’s value in the aftermath of the central bank decisions and non-farm payrolls, there would have been some hope that the euro and pound might recover some of the lost ground. However, instead of that, both currencies struggled to make any sustained headway. It was noticeable that the pound dropped to its lowest levels versus the dollar in over a month, whilst against the euro, it fell to levels not seen since the chaos of late in the third quarter of 2022. The fact that the US dollar held onto its gains may have been thanks to the further indications from the Fed that it would continue to tighten monetary policy, as well as those negative releases from the UK and Germany mentioned above. 

For this week the macroeconomic backdrop for the pound and euro remains tricky. There are important data releases due from the UK (labour market, consumer prices and retail sales) alongside a speech from Bank of England Chief Economist, Huw Pill. In Euroland the focus may well be placed more on further comments from ECB (European Central Bank) members such as Chief Economist Lane, President Lagarde, and Governing Council members Panetta, Nagel and Villeroy. However, GDP and employment figures for Q4 and December industrial production figures from Euroland may also provide some valuable information on economic performance. As for the US, consumer prices data for January is likely to be the key release. With the Federal Reserve concerned about how sticky inflation will be, the larger focus is likely to be on core, rather than headline, CPI (Consumer Price Index) inflation, in my view. Given efforts to recover lost ground by the euro and pound have so far been rebuffed, is there greater risk of renewed downside to come?

The RBA (Reserve Bank of Australia) hiked 25 basis points, as did the RBoI (Reserve Bank of India) last week, in moves well-telegraphed ahead of the meetings and well-priced for by the financial markets. However, the RBA did hint at the need for additional monetary tightening to come, with the risks of a wage-price spiral growing. While the RBoI hinted at more rate rises, the markets didn’t pay much attention to those warnings. The Swedish Riksbank raised its key official rate another 50 basis points, but the markets think rates are close to their peak, with the April meeting likely to hold one last tightening in store. It was left to Banxico, the Mexican central bank to provide the fireworks, with an unexpectedly large 50 basis point hike at its meeting, when the market had been expecting only 25 basis points. The concern from the central bank was that inflation was not slowing as quickly as expected, and the longer inflation stayed in the system, the more likely it will prompt significant wage inflation. In terms of currency moves against the USD, the AUD made little headway, even after the RBA’s decision, the INR lost ground over the course of the week, but the SEK strengthened a little bit. As for the MXN, it has looked to recapture losses endured at the very beginning of the week, and the interest rate decision did not interfere in that process. 

As for this week, there are only two central bank meetings of note due. First up is the Bank of Indonesia meeting, which is expected to leave interest rates at 5.75%. Following that is the central bank of the Philippines, which is expected to hike a further 25 basis points, bringing its interest rates in line with Indonesia’s. There is still the risk of further hikes to come, but both central banks are closing in rapidly on the peak for interest rates, in my view.