Daily Market Outlook, February 7, 2024

Munnelly’s Market Minute…“FedSpeakers On Deck, With A Scant Data Docket”

Asian stocks were mostly positive due to a decline in global yields and further Chinese support efforts. Nikkei 225 was indecisive due to a slew of earnings and with the BoJ reportedly on track for a policy shift by April. Hang Seng and Shanghai Comp were mixed despite early momentum following the latest support efforts from China, targeting real estate financing and new energy vehicles. Chinese stocks gradually faded some of their initial gains, and the Hong Kong benchmark ultimately turned negative.

Today, Fedspeak dominates discussions as major data releases are scant, except for the US trade balance. German industrial production figures for December, released earlier this morning, underscored ongoing pressure on the sector. Industrial output in Europe’s largest economy contracted by 1.6%, surpassing forecasts for a bigger drop, resulting in production levels 3.0% lower than a year ago. This weakness contributed to the latest estimate of a 0.3% quarter-on-quarter decline in German GDP in the final quarter of 2023. The Eurozone's overall picture appears mixed, with France reporting an increase in industrial production for December last week. Spanish industrial data are expected this morning.

In the UK, no major releases are scheduled for today. However, the RICS will update its survey of the housing sector overnight. In December, the net balance of surveyors reporting higher house prices remained negative at -30%, but it was the least negative balance in over a year, aided by lower mortgage rates. Market expectations anticipate a further improvement in the net balance in January to around -22%, marking a fifth consecutive month of improvement.

Overnight, China will release inflation data. China's inflation dynamics differ from those in the US and Europe, with CPI inflation expected to remain weak and stay negative, partly due to subdued demand in the economy. Markets forecast annual CPI to be -0.5% in January, down from -0.3% in December, and for producer price inflation to remain largely unchanged at -2.6%.

Stateside, the December trade balance is anticipated to narrow to around $62 billion. Alongside, several Fed speakers, including Kugler, Collins, Barkin, and Bowman, are scheduled to appear at various events today. Their perspectives on the economic and policy outlook will be notable, but consensus suggests it's premature to declare victory on inflation. Recent robust US data also indicate that a March rate cut is now improbable. The United States Treasury will sell $42bln of 10yr notes, after selling 3s on Tuesday.

Overnight Newswire Updates of Note

ECB’s Schnabel: Lower Borrowing Costs Risk ‘Flare-Up’ Of Inflation
UK MPs Sound Alarm Over Fiscal Cost Of Unwinding Quantitative Easing
UK May Have Slipped Into Recession In Late 2023, Think-Tank Estimates
UK To Wave Through Animal Products From EU If Ports Are Overwhelmed
Fed's Harker Says A 'Soft Landing' Is In Sight As Inflation Wanes
Fed’s Mester Warns Against Cutting Interest Rates Too Soon And Too Quickly
Fed’s Kashkari Says Need To See More Progress On Inflation
Israel Aid Bill Fails In US House As Ukraine Standoff Deepens
Bank Of Canada Chief Says Rates Can’t Fix High Housing Costs
China To Help NEV Industry Respond To Foreign Trade Restrictions
Saudi Says No Israeli Ties Unless Gaza ‘Aggression’ Halted
Ford Tops Q4 Estimates, Guides Toward Strong 2024
Amgen Q4 Revenue Surges As Acquisition Boosts Results
NYCB Extends $4.5 Bln Stock Rout To Lowest Level Since 1997
NYCB’s Credit Rating Downgraded To Junk On Real Estate Concerns

(Sourced from Bloomberg, Reuters and other reliable financial news outlets)

FX Options Expiries For 10am New York Cut

(1BLN+ represent larger expiries, more magnetic when trading within daily ATR)

EUR/USD: 1.0725 (1.2BLN), 1.0800 (559M)
GBP/USD: 1.2600 (220M), 1.2660 (273M), 1.2750 (345M)
AUD/USD: 0.6450 (548M)
USD/CAD: 1.3500 (434M)
USD/JPY: 147.00 (1.1BLN), 147.75 (370M)
EUR/JPY: 157.50 (260M), 158.00 (300M)
The USD's rise has led to lower FX option trade volumes and reduced implied volatility and premiums. Demand and prices are higher for certain options, including those expiring around the February 13 U.S. CPI data and the May 1 U.S. Federal Reserve policy decision. There is also interest in buying USD/JPY options ahead of Bank of Japan policy meetings. The lack of demand for outright USD calls against most G10 currencies suggests a belief that further USD gains will be slow and limited.