Economists have raised growth forecasts for the UK. Bank of Canada may push back its rate cut

By JustMarkets 

At Friday’s close, the Dow Jones Index (US30) was up by 0.07% (-0.67% for the week), while the S&P 500 Index (US500) was up by 0.18% (-1.86% for the week). The NASDAQ Technology Index (US100) closed positive by 0.09% (-3.83% for the week).

The dollar rose to a 3-week high on Friday morning after a stronger-than-expected US December payrolls report dampened expectations that the Federal Reserve will soon cut interest rates. However, the dollar gave up mid-day and moved to the downside after the ISM Services Business Activity Index for December in the US came in weaker than expected. US nonfarm payrolls for the decade rose by 216,000, exceeding expectations of 175,000. The unemployment rate for December was unchanged at 3.7%, which was stronger than expectations for an increase to 3.8%. The US average hourly earnings for the decade rose by 0.4% m/m and 4.1% y/y, stronger than expectations of 0.3% m/m and 3.9% y/y. The US ISM Services Business Activity Index for the decade fell by 2.1 to a 7-month low of 50.6, weaker than expectations of 52.5. Also boosting stocks were dovish comments from FRB President Richmond Barkin on Friday, when he said he was not opposed to lowering interest rates as the economy normalizes and confidence grows that inflation will fall.

Statistics Canada showed Friday that labor productivity — a broad measure of real gross domestic product per number of hours worked in the economy — has declined in the country for six consecutive quarters. Economists say the measure is critical to improving Canada’s quality of life, and the decline will be of particular concern to the Bank of Canada (BoC), which will determine what benchmark interest rate to set next. While productivity has stalled, Friday’s jobs report shows average hourly earnings accelerated to 5.4% year-over-year in December. Bank policy makers note that average hourly earnings growth in the 4% to 5% range falls short of the 2% inflation target.

Equity markets in Europe were mostly down on Friday. Germany’s DAX (DE40) fell by 0.14% (-0.09% for the week), France’s CAC 40 (FR40) lost 0.40% (-1.89% for the week) on Friday, Spain’s IBEX 35 (ES35) fell by 0.18% (+0.46% for the week) on Friday, and the UK’s FTSE 100 (UK100) closed negative by 0.43% (-0.43% for the week). The Euro Stoxx 50 Index (EU50) fell to a one-month low on Friday, and European government bond yields rose to 3-week highs after the Eurozone’s December consumer price index accelerated from November, reducing the ECB’s chances of easing monetary policy.

Goldman Sachs Group Inc. and Bloomberg Economics raised their growth forecasts for the United Kingdom, giving hope to the economy as the economic outlook improves even as floods and strikes shake the country. In the markets, analysts have raised their forecasts for sterling, with investors recently turning bullish on the currency for the first time in three months. Some are also seeing signs of a reversal in equities on the back of stronger retail sales figures.

German retail sales for November fell by 2.5% m/m, weaker than expectations of 0.5% m/m and the biggest decline in 19 months. Germany is the economic engine of Europe, so if the German economy is struggling, it is likely that the rest of the EU is too. However, German manufacturing PMI data — although still in deep negative territory — showed signs of improvement, rebounding from a low of 38.8. The ZEW economic sentiment index, which measures experts’ views on the direction of the European economy over the next six months, also rose from its pessimistic low of September 2023.

As transportation corporations divert ships away from the Red Sea, retailers face the biggest upheaval in shipping since COVID-19 threatened the freight industry in 2020. As a result, Western retailers may wait longer for goods to arrive from China, and shortages will drive up prices. The British Retail Consortium said the rising costs could reverse the trend of lower food price inflation. It could also affect energy supplies to Europe.

Asian markets were mostly down last week. Japan’s Nikkei 225 (JP225) fell by 0.93%, China’s FTSE China A50 (CHA50) lost 2.73% over five trading days, Hong Kong’s Hang Seng (HK50) ended the week down by 3.11%, and Australia’s ASX 200 (AU200) ended the week negative by 1.32%.

On Friday, the People’s Bank of China (PBoC) said it will strive to maintain buoyant financial activity and expand financial openness this year to support economic growth and high-quality development effectively. The PBoC will deepen financial market opening by facilitating foreign investors’ participation in China’s bond market, the statement added. In addition, efforts will be made to strengthen the interconnectivity of domestic and overseas financial infrastructure, participate in the formulation of rules for international trade involving the financial sector, and further improve the policy system to facilitate the cross-border use of the yuan.

S&P 500 (US500) 4,697.24 +8.56 (+0.18%)

Dow Jones (US30) 37,466.11 +25.77 (+0.07%)

DAX (DE40)  16,594.21 −23.08 (−0.14%%)

FTSE 100 (UK100) 7,689.61 −33.46 (−0.43%)

USD Index  102.44 +0.01 (+0.01%)

• – German Trade Balance (m/m) at 09:00 (GMT+2);
• – Switzerland Retail Sales (m/m) at 09:30 (GMT+2);
• – Switzerland Consumer Price Index (m/m) at 09:30 (GMT+2);
• – Eurozone Retail Sales (m/m) at 12:00 (GMT+2);
• – US FOMC Member Bostic Speaks (m/m) at 19:00 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.