Monthly Market Outlook

In February, the markets experienced a significant shift due to the massive jobs report released at the beginning of the month. The Federal Reserve’s two of the favorite inflation gauges, PCE and Core PCE, also surprised the markets with an unexpected rise. As a result, FED members became more hawkish, and the significant stock market rally that began this year took a hit due to the rising FED expectations.

Moving into March, the new jobs report and updated projections from the FED and ECB are likely to be the primary drivers throughout the month.

Macro View

In the US, the main topic of discussion is the extremely tight job market and the slowdown of the fall in inflation. The latest jobs report was particularly strong across the board. Non-farm payrolls increased by 517,000, with 397,000 of those jobs coming from the services sector. The unemployment rate fell from 3.5% to 3.4%, defying expectations of an increase, while the participation rate rose by 0.1% to 62.4%.

Despite the majority of job gains coming from lower-paying positions and job losses being seen in the higher-paying tech sector, average hourly wage gains fell less than expected on a yearly basis and remained the same on a monthly basis. This extremely tight job market could potentially fuel inflation going forward.

The downward momentum of inflation came to an end with a fall of only 0.1%. However, the biggest surprise came from the PCE deflator, as both PCE and core PCE rose to 5.38% and 4.70%, respectively. For 2023, the FED’s projections were 3.1% and 3.5%, but these projections will likely be updated upward at the next FOMC meeting at the end of March.

With the data showing a tight job market and rising PCE, FED members have already become more hawkish. Two of the most hawkish members, Bullard and Kashkari, have discussed the possibility of 50 basis point hikes, while most members have hinted that there will be no rate cuts this year after reaching the terminal rate. The terminal rate is another topic of discussion, with most members expecting it to be at 5.25% or 5.50%, while the December projection for 2023 was 5.1%. This is something to look out for in the March meeting as well.

The service sector has been the main driver of increasing inflation and a tight job market, with most job gains and price increases coming from this sector. The ISM services index rose from 49.6 to 55.2 in January and stayed above 55 in February, indicating continuously increasing activity for services. Its sub-indexes also showed more to come, with new orders at 62.6, employment at 54, and prices paid at 65.6, all showing an increase.

On the manufacturing side, the ISM increased from 47.4 to 47.7, showing that the slump is resuming but is less severe for the manufacturing sector. New orders increased to 47 from 42.5, but it is still below 50, while employment fell to 49.1 from 50.6. However, the most important sub-index for the ISM manufacturing report was “prices paid,” which jumped from 44.5 to 51.3, causing surprise and fueling worries that inflation may not be tamed easily as markets thought. With the ISM services indexes, PCE deflator, and strong jobs reports for both monthly and weekly ones, strong core inflation could be a problem all year long.

With strong inflationary pressures starting to show and FED members turning slightly more hawkish, the gap between FED projections and market pricing closed sharply. Terminal rate expectations fell as much as 4.8% this year, but now it is close to 5.50%, while for the next FOMC, a 50 basis point hike is now pricing at a 24.7% probability.

However, this week could be a game-changer for the month, as both JOLTS and monthly jobs reports will be released, while Powell will appear before Congress, which could increase market volatility significantly.

PMI data suggests that global economic activity is increasing at a faster pace. One of the most notable developments was in China, where the end of the zero-covid policy led to a faster-than-expected economic recovery. Composite PMI rose from 42.6 to 56.4 in just two months, indicating a significant increase in economic activity.

Manufacturing PMI is also up to 52.6. The recovering Chinese economy may also have implications for the global economy, including increases in the prices of metals, minerals, transportation, and energy. It is also possible that end product prices may start to fall. However, if energy prices start to increase, as they may have already begun to do so for natural gas, this could have consequences for the Eurozone, which could be a story to follow in the coming months.

UK economy is showing surprising resilience, but it is weaker than most of its counterparts. The CPI, GDP, and wage data were lower than expected. Lower inflation pressures could help the Bank of England navigate the rough times ahead. The post-Brexit deal could also improve trade between the Eurozone and the UK, possibly leading to a shallower recession. The next Bank of England meeting is scheduled for March 23rd, and the markets currently expect a 25-basis point hike with a 91% probability.

Eurozone economic data indicates a faster recovery, but core inflation is stronger. Market activity is increasing, business confidence is recovering, and there is no significant weakness in growth for now. Gas stocks are way higher than the previous year’s winter averages, and the Euro is not as weak as it was at the end of last year. However, the resilience of core inflation and a possible increase in energy prices could pose a problem in the coming days.

Core CPI has surprisingly risen to 5.6% from 5.3%, showing no signs of slowdown despite the year-on-year calculation effect. If gas and oil prices start to rise with the recovering Chinese economy, the ECB’s hands will be full after the March meeting.

The ECB has already agreed to a 50 basis points hike for March when members will update economic projections and discuss the future rate path. Some hawkish members are already talking about a 4% terminal rate with continuing 50-point hikes, and markets seem to agree with them.

On the swap markets, the ECB’s terminal rate pricing has hit above 3.9% with no signs of rate cuts for a one-year period. What happens after the March meeting will be one of the main drivers for the Euro.

As for Japan, the main topic was the next Bank of Japan chair. When Ueda’s name was first mentioned, it caused a big surprise for the markets. Not many people know Ueda outside Japan, but the Japanese yen immediately gained value after the news. However, the market reaction did not last long. Ueda signaled that it is too early to end extra loose monetary policy, at least for now. Ueda told Congress that he is expecting inflation to retreat for the year to below 2% and that BOJ should keep its policy to stimulate inflation. Ueda’s nomination is almost certain to pass. The next vice-chair nominee for the Bank of Japan, Uchida, also stated that it is too early to change the current policy. Despite the support, the current policy will not be viable for too long. The BOJ is buying bonds too fast, and it will surely break the bond market if this continues for too long. Investors are testing the 0.5% limit for 10-year bonds almost every day.

Central Bank Meeting Calendar

Technical View

The US 10-year bond returned inside the trend after falling below it and reached 4%. The trend is still ongoing, but up moves seem less powerful. The momentum is not the same as in previous times when the lower line of the trend channel had been tested. This outlook can change depending on the jobs data, just like in February. Another strong data release could be a good reason for the trend to continue. But as the momentum weakens, a weak data release could cause the trend to break down. Possible resistances for an upside move are 4.5% and 4%.

Brent has broken the uptrend and is now gathering strength to begin an upward move. The main resistance for now is at 90, which is holding back advances while the bottoms are gradually increasing, forming an ascending triangle pattern. The increase in activity from China is supporting the upside moves. If a breakout occurs, the middle point of the June-December fall at 100 could be targeted. However, if the breakout does not occur, the momentum could easily shift to the downside. The main support zone to watch for now is the 79-81 zone.

Precious metals did not enjoy the strong jobs report and slowing inflation fall in US. Since the beginning of February, gold has fallen by 3.47%, silver by 9.90%, platinum by 3.04%, and palladium by 11.28%. However, on March 1st, China’s PMI data helped to change the downtrend a bit, and the metals are now attempting to recover from the previous month’s losses. Further positive news from China or weaker inflation and jobs data from the US could provide support for the metals this month.

The gold/silver ratio tends to have a reverse correlation with gold prices. A relatively strong gold versus silver is not supporting a lasting uptrend for the two metals for now. Gold and silver bulls should be alert for a stronger silver market to see a longer and stronger uptrend for both silver and gold.

ETF gold holdings were steady since early November, but from February to date, they have begun to decrease again. For upside moves to become lasting, ETF holdings should remain at least steady. On the other hand, the biggest supporters of gold seem to be central banks. According to the latest data from the World Gold Council, central banks continued to be net buyers in January. The two biggest buyers were the PBOC and the Central Bank of Turkey.

The 10-year real yield continues to heavily influence gold prices. The recent jump in yield caused an end to the three-month uptrend in a harsh way. Gold bulls should look for inflation expectations and the 10-year government bond rate to breakdown its uptrend for steadier upside moves. According to models based on yields, the gold price is still too overvalued at the moment.

Bloomberg’s US recession probability index (based on surveys and forecasts) is at %60, down %5 for the month but still too high. Central bank purchases and recession risks are the main drivers of gold at the moment. The recent data from the US, Eurozone, and UK lowered the recession expectations for the US and the globe just a bit. Some Fed members also signal that the probability of a soft landing is increasing. However, one month won’t change the trajectory by far. March data will be crucial for the economy, forecasts, and of course, precious metals.

Gold bounced perfectly from the key support zone of 1770-1805 and is now over the 1842 and 1850 resistances. While fundamentals show an overvalued gold at the moment, the technical outlook says otherwise for the shorter term. If gold can hold above 1842, upside moves might continue to the low 1900s. On the other hand, the longer outlook is not as clear as the shorter one, and there is a jobs report waiting like a time bomb for both bulls and bears at the end of this week. For longer timeframe traders, the 1770-1805 zone could be one of the main indicators for direction.

After the incredible rally from October to the end of 2022, silver bounced back from the upper line of the trend channel in a big way. The 21.40-22 zone has been cracked and is now being retested. This zone might be the main resistance to follow this month. If silver can’t break and hold above this zone, downward pressure will continue. Silver enjoyed industrial demand in 2022 and rising demand expectations for 2023. If silver can’t break the resistance zone and falls to a lower area of the trend channel, it could create long-term bullish trade opportunities for traders.

The dollar index enjoyed strong US data and the closing of the gap between Fed projections and market expectations. 105.18 is currently the main resistance and has been tested for the last two weeks. If broken, an upside reaction might continue for a while. As for the downward moves, 103 and the 100-week exponential moving average at 101.56 can be followed as possible support levels in March.

Stock markets had a weak month in February but jumped with the start of March. Nasdaq and DAX paved the way for the rest, with both gaining around 3% in value. As the manufacturing sector is weaker than services, the Dow Jones felt the weakness and fell 1.11%. The S&P 500 has risen 0.50% from February to date.

The S&P 500 broke out from the months-long downtrend in January. After the change in Fed rate expectations, it fell to the upper line of the broken trend channel for a pullback. The 3900-4000 zone is massive support, with the upper line of the broken trend channel, a key horizontal support, lower line of the newly formed uptrend channel, and the 200-day moving average all converging in this area. For the last two days, the S&P 500 has made a nearly 3% jump from this key support zone. As long as it holds, upward pressures can build up for longer-term moves. However, a breakdown below might change the positive technical outlook in a big way.

FX crosses have felt the impact of the recovering dollar index throughout the month. Among the group, JPY and AUD have been the weakest. JPY has been affected by Ueda’s dovish comments, while AUD fell due to slowing GDP, CPI, and lower-than-expected wages. On the other hand, GBP and EUR have recovered due to better-than-expected data and the Sunak-von der Leyen deal for post-Brexit.

The EURUSD technical outlook is looking the most unclear it has been for almost 2 years in the short-term. Two downtrends for different timeframes have been broken to the upside, but now a possible pullback is happening. The main resistance zone to follow is 1.075-1.08. Below it, downward moves could extend to as much as 1.0285-1.0340 zone. For a less bearish scenario, the 1.046-1.048 zone might create good support as well. With all that, EURUSD can move either way depending on the data. A breakout above 1.08 can lead to prices above 1.10.

There are some key fundamental data to follow to predict EURUSD movements, and most of them are related to government bonds and central bank expectations. One of them is the spread between Germany and US real yields. The data is highly correlated with EURUSD. According to one of our models which uses yield spreads as an independent variable, EURUSD has a lot more upside potential for 2023 if the current spreads hold.

Another key indicator for EURUSD is from within the Eurozone: the spread between Italy and Germany’s long-term bond rates. This spread is usually an early signal of financial problems in the Eurozone and, when it becomes big enough, political problems as well. It has a relatively high negative correlation with EURUSD and is currently supporting the upward moves. However, if the ECB raises rates too high, the balance of rates within the Eurozone could be damaged.

Option market pricing can also be a good indicator for EURUSD at times. In the chart below, it shows EURUSD with different expiry-dated options’ risk reversals. Almost all of the risk reversals have changed their slope to the upside since the middle of February, especially the short-term ones, but EURUSD continues to fall. This could be seen as divergence despite the fact that the reversals are still below zero.

GBPUSD is currently moving sideways after the breakdown of the rising wedge formation. The 1.1875-1.20 zone, which is supported by the 200-day moving average, is the main support zone for any downward moves. A breakdown below this zone could accelerate further southward movement. On the other hand, the 1.2385-1.24 area is the main resistance zone for now and has denied bulls on two occasions. In fact, one of the tests lasted for 12 days. This Friday will be an important day for GBPUSD traders. UK’s GDP, production, and trade data will be released, while the US will announce its jobs report.

USDJPY surged following strong US data and dovish comments from chair and vice-chair nominees for the Bank of Japan, and is now approaching a key junction. 135 and 136.70 were two key resistance levels for USDJPY. While one of them has been surpassed, the second one, which is also supported by the 100-day moving average, is still holding strong. If USDJPY can maintain its position above 135 and breakout above the second resistance, upward movement may continue. In this scenario, resistances to follow would be 139.60 and 142.50. However, if USDJPY drops below the 135 support, the main supports for March will be 133 and 130.