Monthly Market Outlook

In February, markets were characterized by cautious optimism. US economic data mostly came out strong again, expectations for rate cuts normalized, and the chance of a soft landing improved, while in the EU and Japan, the recovery remained weak. 

Looking ahead to March, traders will face a very busy schedule. The ECB and the Fed will update their forecasts, providing greater clarity on the possibility of rate cuts. 

Macro View 

The US economy is growing robustly despite tightened financial conditions. Over the past 25 years, the yearly average growth rate of M2 money supply has been 6.7%. As of February, money growth has remained near 2 standard deviations below the average, at -2%. While M2 is decreasing, US GDP has remained exceptionally strong over the past two years and the last two quarters, significantly outpacing the 25-year average with growth rates of 4.9% and 3.2% respectively. This growth has been fueled by strong demand and spending, driven in part by the retreat of inflation, which has encouraged households to increase their spending. With the latest indicators showing stronger personal income and robust PMIs, there is potential for growth to remain relatively strong in the first quarter as well. 

US growth is supported by a strong jobs market as well. Unemployment has remained below 4%, while net nonfarm payrolls have increased significantly beyond expectations. Last month’s addition of 353k jobs was particularly impressive. The number of job openings, remaining around 9 million, also indicates strength despite some normalization in the jobs market. Historically, most rate hike cycles end with a rise in unemployment. If rate cuts begin while unemployment is still below 4% and GDP remains around the long-term average, it could be seen as a significant victory for the Federal Reserve. 

Strong growth in the jobs market has begun to heat up prices as well. In January, one of the main inflation gauges closely followed by the Fed, the Personal Consumption Expenditures (PCE) index, increased by 0.3% on a monthly basis, while the core PCE rose by 0.4%. On a yearly basis, core PCE fell to 2.8% from 2.9%, indicating persistence in inflation. However, perhaps the most crucial data came from one of the Powell’s favorite indicators, supercore inflation. Supercore inflation rose by 0.596% in January, the highest since December 2021. Moreover, on a yearly basis, the trend is turning upward, which could be seen as a concern by Fed members. 

Market rate cut expectations normalized in February, buoyed by persistently strong data from the US. In our current view, the base scenario for 2024 involves three cuts, commencing in June. Swap markets are currently pricing in the first cut in June, with a total of four cuts having a 62% probability for the entire year. March will be crucial for determining the rate-cutting path, beginning swiftly with Powell’s testimony and payroll data, followed by the FOMC’s updated forecasts, which will provide a clearer picture for the markets. 

PMIs indicating promise for global growth continue to be a positive sign. The manufacturing sector remains weak despite some small signs of recovery, while activity in the services sector is growing rapidly. The rapid growth in services increases the risks of persistent inflation due to tight labor markets globally, while slow growth in manufacturing helps keep commodity prices in check. The Eurozone’s PMI shows some promise of recovery but remains below 50, indicating ongoing challenges, while Japan’s PMI is above 50, though the trend is showing a downside. The slowdown signals from Japan might pose problems for the Bank of Japan’s end of negative rate plan or, at least, may prevent further hikes after its conclusion. Regarding the UK, a tight job market, higher-than-expected house prices, combined with a surge in PMI, led to reduced rate cut expectations for 2024 by more than one step throughout February. 

There are continuing risks for the global economy, primarily stemming from geopolitical tensions in Gaza and Ukraine. Despite ongoing attacks in the Red Sea, their effects have remained limited thus far. Upside inflation risks persist, with the disinflation process appearing to slow down globally. 

One risk to watch for in March is the possibility of a government shutdown. While the chance is small, as Trump appears to have an advantage in the presidential race, Republicans will likely carefully consider any dramatic decisions. However, pressure on Johnson is rapidly increasing from House Republicans. 

Perhaps one possible black swan risk for the economy could come from the real estate market, especially from commercial real estate. After the Covid-19, the work from home system seems to be here to stay. With the high rates continuing longer than the market expectation over a year, the pressure on real estate increased. MSCI World Real Estate fell more than 35% since 2022, nearly half of the great 2008 real estate crash. So far, housing has stayed much stronger than expected despite the high mortgage rates but traders should keep an eye out for the remainder of 2024. 

Central Bank Meeting Calendar

Technical View

The US 10-year government bond yield is testing the 4.15 level after regaining it at early February. As long as it holds, the yield might gradually increase below the broken red trendline. A hawkish Powell speech, strong payrolls data, or hawkish FOMC forecasts could further increase the upside risks. 

Brent is moving within a rangebound pattern between 80 and 85. Strong growth numbers and elevated Middle East risks are currently supporting the price. If the risks decrease or the Fed maintains a hawkish stance, the price might retreat to the 75-80 zone. However, a breakout above 85 could lead Brent to test the 90 resistance level once again. 

Precious metals, except palladium, had a stable month with slight negative pressure. However, on the first day of March, metals surged strongly. With this in consideration, gold gained more than 2%, while silver, platinum, and palladium ended the month in negative territory. Palladium, in particular, was close to key support levels after experiencing significant declines for months, leading to a very volatile period during February. 

ETFs continue to reduce their gold positions, as this trend has persisted since early 2022. Despite this, gold prices are soaring towards $2100. The last time ETF holdings were at this level, gold was priced below $1600. 

Gold returned towards its moving averages in the first half of February after testing the key 2050-2075 zone, but it quickly recovered and is now trading above the resistance. If it can hold above this zone and break through the 2086 level, upward pressure might extend towards 2150. However, the massive surge might be temporary, as the first week of March, including Powell’s testimony and the jobs report, could potentially have a significant effect on the markets. 

The major contraction of silver prices continues, with even more force. The triangle pattern from 2020 remains ongoing. Throughout February, silver remained between 22 and 23.50. Even with gold’s massive move on the first day of March, silver stayed below 23.50. A break to the upside could trigger a bullish move towards the upper line of the triangle. However, if silver fails to make a breakout, the 21.40-22 zone will become the next target once again. 

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, attempting to stay above the 200-day moving average. If it continues to hold, the dollar index may finally make an upward attempt, or alternatively, break below and feel more bearish pressure. March might become the month when volatility begins to increase again. 

The stock markets continued their rise in February. When the upward momentum began to fade, Nvidia’s massive earnings helped recover lost momentum. With the AI sector becoming the spearhead once more, stock markets surged, led by Nasdaq which brought a 4.16% return. Dax also had a magnificent month, breaking out of key resistance and rising more than 4.10%. Despite a 1.20% increase, Dow Jones’s return remained relatively low as the manufacturing sector still hasn’t made any significant recovery. 

The VIX only experienced a temporary and brief spike in February but remained at very low levels apart from that move. This indicates that the bullish pressure is still too strong for the stock markets. 

The S&P 500 pushed past the 5000 barrier and optimism in the market continues. Many individual stocks broke their resistances as the index surpassed 5000. The current uptrend is supported by the 34-day moving average, and as long as it holds, upward pressure might continue. Targets to follow in March include 5200 and 5254. 

The FX market remained mostly stable. EURUSD finished the month flat, while USDJPY rose more than 1.5% due to weak Japanese data. CHF was underappreciated by the markets. 

EURUSD has been moving flat since November, trading between 1.07 and 1.11, and this pattern persisted in February. Currently, EURUSD is testing the 50-day moving average, which serves as a key resistance between the major levels. Momentum appears to be shifting in favor of the euro, and with a possible break of the moving average and some assistance from either Powell or jobs data, the price might head towards the upper boundary. However, macroeconomically, the US economy is performing much better than the Eurozone so far. This could exert extra downward pressure if circumstances do not change. 

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 appear to have reached their peak and are starting to decrease. However, EURUSD has remained strong so far. The coming weeks will be crucial for EURUSD for both the long-term and medium-term outlooks. 

USDJPY has reached a major resistance zone. Moving past 150-152 will be challenging given the flat dollar index, Ueda’s plan to end negative rates, and possible intervention risks. Therefore, the baseline scenario is for it to fall towards the trendline again. However, fundamentals suggest that the JPY is still under heavy pressure, as Japan’s data was not particularly strong despite the ultra-loose policy. If the dollar index recovers in March and wage growth falls short of expectations in Japan, upward pressure will increase substantially. The formed ascending triangle also supports these fundamentals. USDJPY will need to decide whether to break out or turn towards the trendline and test it once more in March.