Monthly Market Outlook

In January, robust US growth, job figures, and PMI numbers served as the primary drivers of the market. Globally, the manufacturing sector signaled a potential comeback, while central banks maintained a tight leash over their respective economies.

Looking ahead to February, traders may adopt a cautious stance as they await the March meetings of the European Central Bank (ECB) and the Federal Reserve (FED). Early positioning may be influenced by incoming data during this period.

Macro View

Composite PMI data for many developed countries surged in the last two months. As seen in the chart below, China, Japan, the UK, and the US composite PMIs are all above 50 and rising. In the Eurozone, despite an increase in PMI, activity has continued to slow for the past 8 months. JP Morgan’s global PMI was 51 in December, indicating a gradual rise in global economic activity, which is expected to potentially be higher for January as well.

Manufacturing PMIs for that list are all below 50, except for the US. US manufacturing PMI jumped to 50.7 from 47.9 in just one month, indicating a potential start of recovery. Similarly, in the Eurozone, the PMI also experienced a rapid increase in the last two months, rising from 43.1 to 46.6. However, it still remains well below the 50 level, signaling a negative divergence and a fast decrease in activity. In contrast, China and Japan PMIs show no signs of significant recovery thus far.

If the current manufacturing PMIs continue to increase in the EU and the US, and if China returns to a level above 50, commodities might also start their recovery. The range of 94-97 serves as a major support zone for the Bloomberg Commodity Index, halting the downward moves since September 2022 and being aggressively tested in the last two months. However, a potential signal from the manufacturing sector for recovery could change the downtrend. Additionally, geopolitical problems increase the upside risks, especially in the Red Sea region. If sea transportation costs remain higher for an extended period, it might begin to affect inflation as well.

The US GDP print for the fourth quarter came in above expectations at 3.3%. The annualized quarter-over-quarter GDP average for the last 25 years is 2.3%. Despite the last quarter’s GDP growth being high as 4.9%, and the Federal funds rate being above 5%, it demonstrates the current strength of the US economy, coming out nearly 1% above the 25-year average.

The Federal Reserve (FED) forecasted at the December meeting that growth would fall to 1.4% in 2024, but the recent strong PMI numbers tell a different story, at least for now. Not only is GDP growing, but employment remains strong as well. Nonfarm payrolls increased by 353k in January, far exceeding all expectations. Moreover, December’s already strong payrolls data, was significantly revised up to 333k. These robust job gains are accompanied by wage increases. Average hourly earnings rose by 0.6%, the highest since March of 2022, and monthly growth has been accelerating for three consecutive months now.

While economic activity is rising and the job market remains tight, inflation continues to cool down. The core Personal Consumption Expenditures (PCE) is on a downtrend and stayed below 0.2% in December data. The February inflation data will be crucial for the Federal Reserve (FED) to decide the timing of possible rate cuts.

At the FOMC meeting, Powell clearly stated that a possible March rate cut is unlikely. Following Powell’s speech, the expectation of a rate cut in March fell to 20% from 100%, and the total number of expected cuts this year dropped to 5 from 6 in the swap markets, all within one month. With very strong fourth-quarter growth, rising activity data from PMIs, and a robust jobs report, the sentiment shifted. In February, traders will closely follow the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) data. On a monthly basis, an increase above 0.2% might be bad news for dollar bears.

One thing that traders can watch for as a potential early indicator of surprise rate cuts is the usage of the Federal Reserve’s overnight reverse repo facility. The amount parked in reverse repo has fallen to $513 billion from over $2 trillion in the last 6 months. During this period, the usage of backstop liquidity tools for banks has increased significantly. While there is no indication of a liquidity problem so far, it would be wise to monitor liquidity levels after the end of emergency bank lending in March for possible Federal Reserve loosening, perhaps not in the form of rate cuts but potentially slowing the pace of balance sheet reduction.

The European Central Bank (ECB) is still attempting to maintain a hawkish stance. Hawks within the ECB want to wait for wage data and hold rates until June, but the weak economic outlook has been extended for another month. Despite some recovery in Purchasing Managers’ Index (PMI), they still indicate a fast decrease in activity, and inflation expectations remain anchored just above 2%, close to the lowest levels since last January.

Japan is grappling with weak data as well. Bank of Japan (BOJ) Governor Ueda hinted at a possible incoming normalization, but recent data clearly shows that inflation pressure and the job market do not support rate hikes. Markets are pricing in at least two hikes from the BOJ, and for the first one, there is a 74% probability it will occur in April.

Central Bank Meeting Calendar

Technical View

The US 10-year government bond yield quickly dropped from the 5% barrier and is now consolidating below the 4.15-4.30 zone. The recent positive data increases the chances of an upward reaction, especially after the strong wages data, but this zone might pose strong resistance to upward moves. CPI data and revisions will be crucial factors until the next jobs report for determining further upward or downward moves.

Brent continues to stay flat over the medium to long term, above $70. Demand has not yet recovered significantly, but supply cuts, recovery expectations due to rate cut expectations, and rising risks over the Middle East are currently limiting downside moves. The latest downtrend ended in January, with rising tensions between Iran and the US being a major contributing factor. Currently, the price is testing the broken trend. If it remains above the broken trend, another upward leg might begin, even in the face of diminishing rate cut expectations for March from the Federal Reserve (FED).

Precious metals did not fare well in the face of a stronger dollar index, resulting in a negative month. Palladium, much like in previous months, was the worst performer with a return of more than negative 10%. Gold, on the other hand, remained strong due to increased geopolitical risks. Towards the middle of the month, all metals started showing signs of recovery, despite very strong US data.

The gold/silver ratio and gold’s negative correlation continue to deviate from the long-term norm, with both the ratio and gold on an uptrend simultaneously. Around the 90 level, the ratio’s advance started to slow down. Geopolitical risks and sluggish economic activity may be two key reasons for this divergence. The 90-91 zone will be observed for further moves in favor of gold and for correlation with the price of gold.

Despite the strong performance, ETFs continue to reduce gold holdings. Starting from the middle of 2022, ETFs’ gold holdings have decreased significantly. The change in holdings and the gold price may be experiencing the biggest divergence of all time in the last two years.

Gold, after a brief retreat, is testing the 2050-2075 zone once again. As long as there is a stabilization over that zone, a downside reaction can be expected. In case of downward moves, 2000 is the first key support to follow. Below it, the 233-day moving average could be the next target. However, if gold breaks and holds above the 2050-2075 zone, short-term upside pressure might extend further to above 2100 in the coming weeks.

Silver‘s price swings have been contracting since the massive jump in 2020. As the bars get closer to the triangle’s third side, waves are getting shorter. The 21.40-22 zone remains a strong support zone and might be tested again in February. If, however, 23.50 is surpassed, another upside leg can begin.

The dollar index has remained mostly flat since November 2022, fluctuating between 101 and 107, with a brief downside slip in July of the same year. Currently, the index is positioned in the middle of this range, between the 100 and 200-day moving averages. The recent strong data from the US and the weak EU economy have propelled the dollar index from 101 once again. If the robust data trend continues into February, the next major target will be the 107 resistance level.

The stock markets continued their rise in January, with the MSCI World index increasing by 1.14, led by the AI sector and Nasdaq. Strong earnings from tech giants have further propelled prices. However, as the earnings boost begins to wane, market focus might shift back to central banks in the later days of February.

The VIX index remained low throughout January. If it continues to stay below 15, it will further support the S&P 500 rally.

The S&P 500 is knocking on the door of the 5000 barrier. Reaching 5000, S&P 500 could encounter strong resistance because, in addition to being a psychological level, it is also very close to the upper line of the trend channel and the Fibonacci extension 76.4% level. The upside is being supported by earnings, hopefulness in the AI sector, strong growth, higher economic activity, and falling inflation. On the other hand, if FOMC rate cut expectations are trimmed, a short-term correction seems to be due.

The FX market remained mostly stable after the first few days of 2024. EURUSD fell by 2%, while USDJPY rose more than 4% due to weak Japanese data. GBP stayed strong and remained the most stable throughout the month.

EURUSD is feeling the pressure from the dollar index and is now close to key supports. The 100-day moving average and the trendline from September 2022 can be followed as support. If 1.0750 breaks, the downward pressure might extend further, leading the prices towards 1.048. However, in case of an upside reaction, the 50-day moving average, currently near 1.0910, is the first key resistance to follow.

EURUSD has been in a long-term downtrend since 2008. Whenever the trend is tested with a small or larger margin, net long positions reach local top points. Euro net long positions in the futures market seem to be reaching their peaks, just like in previous instances. During those times, EURUSD fell between 14% to 24%. In the latest instance, which started in early 2021, EURUSD fell nearly 21% in a one-and-a-half-year period.

USDJPY reversed to the upside after testing the middle point of the 2023 jump. The current trend is still showing up as higher lows continue to persist. However, whenever USDJPY surpasses the 150 level, interventions begin, and so far, they have been effective. The markets expect Japan to raise rates while the FED is anticipated to cut them. This may potentially stabilize the currency; however, the expectations seem too optimistic. Because of that, the upward pressure might persist in the coming weeks. Whenever USDJPY surpasses the 150 mark, yen bears should tread with care for possible intervention talks.