The prospect of a Fed rate cut in the first quarter has waned, which provided support to the dollar and bond yields in January. So far in 2024, US data has tended to be better than expected, not lower, so the likelihood of a rate cut by the Fed in March is much lower. While it is not entirely impossible for the Fed to ease monetary policy in March, the chances of it happening are far from what they were at the beginning of the year.
There are two key data events this week that could change the Fed’s interest rate outlook again, namely the US Q4 gross domestic product (GDP) and the core personal consumption expenditures price index (PCE Price Index). If one or both of these data come out of the way than expected, then any subsequent adjustment of monetary policy expectations could cement the trend of a pullback in the dollar and US Treasury yields so far in 2024.
In addition to these data releases, traders will also be keeping an eye on the meetings of the Bank of Japan and the European Central Bank. The yen has struggled against the dollar so far this year as expectations of when the Bank of Japan might start abandoning its ultra-loose policy have been delayed. Meanwhile, the ECB is expected to remain on hold at its benchmark interest rate at 4.5% at Thursday’s meeting. Central bankers at the Federal Open Market Committee (FOMC) and the European Central Bank (ECB) have been suppressing market expectations for an early rate cut in recent weeks, and this trend is likely to continue when we hear from the ECB president.
Gold has been subdued in the face of a well-supported dollar and rising bond yields. The spot contract was trading at $2,026 an ounce during Wednesday’s Asian session. For precious metals to re-challenge the $2050 mark or beyond, it is likely to rely on weaker US economic data such as gross domestic product (GDP) and the core personal consumer price index (PCE Price Index). Conversely, if the US macroeconomic data continues to strengthen, gold may fall back to the psychological level of $2,000 per ounce.
Elsewhere, oil prices have been trading higher this week as some risk premiums have been pumped into them. The ongoing conflict in the Middle East and between Russia and Ukraine has put potential supply disruptions on the agenda, with the WTI contract currently hovering between $74-$75.
The earnings season in the U.S. continues, and while there have been a few companies that have reported disappointing results, nothing has panicked the market so far from a confidence perspective. If Big Tech delivers another good result in Q4 2023, it could support the S&P 500’s rally to new highs. However, the market remains highly sensitive to interest rate movements, so if macroeconomic indicators change the monetary policy outlook further, equities could see a correction. Therefore, all eyes this week will be on the US gross domestic product (GDP) and inflation gauge, the core personal consumer price index (PCE Price Index).