Quiet end to the week but EUR/USD slightly firmer

There was little action on FX markets to close out the week on Friday. The euro had firmed by about 1/2 a cent over the course of the week to about $1.0825 by Friday but was unchanged at around the level for the day.  Sterling also made small gains on the dollar last week to around $1.2675, where it remains this morning. The euro has drifted marginally lower against sterling, to around 85.4p this morning.

In government bond markets, the curve flattened a little last week, as rate cut expectations were pared back a bit, with US 2-year yields up about 5bps for the week while 10-year yields fell about 3bps. Similarly, in Europe 2-year German yields were up 4bps on the week and 10-years down 4bps. 10-year yields on both sides of the Atlantic are drifting a little lower on the open this morning.

US equities had a positive week helped by tech stock inspired boost (from NVIDIA results) on Thursday’s trading which propelled valuations higher. The S&P gained 1.7% on the week while in Europe, the Eurostoxx was up 2.2% There was a more muted performance by UK companies which saw the FTSE more or less unchanged for the week.

The IFO index showed that German business confidence inched higher in February but overall confidence in Europe’s largest economy is quite subdued. The expectations index moved up to 84.1 from 83.5 in January but remains well below the long term average. Data also confirmed that the German economy contracted in Q4, by 0.3% Q-on-Q, lead down by a nearly 2% fall in investment and only a small increase in consumer spending. On the basis of the IFO index, the outlook remains bleak and the Bundesbank is forecasting another contraction in Q1.

Inflation expectations in the Euro area moved marginally higher in January according to the ECB’s latest report. Consumer prices are seen growing 3.3% annually over the next 12 months (from a view of 3.2% in December) and up by 2.5% three years out (unchanged from December). This may come as a marginal fillip to the more hawkish members of the ECB who want to delay rate cuts into further into the year against their more dovish colleagues who will point to slowing inflation and evidence of moderating growth in wages – Euro Area negotiated pay rose 4.5% in the year to Q4 2023 down from a record high of 4.7% in Q3 – as reasons the ECB can afford to move somewhat faster.

There were a number of ECB members out over the past few days urging caution over any expectations of a near term cut in rates and maintaining more data is needed before a shift in monetary policy.  On Friday, President Lagarde said while Q4 wage data was ‘encouraging’ the Governing Council needs to be more ‘confident’ that the disinflation process is sustainable and she emphasized that Q1 wage data – which cover agreements for many sectors for the year ahead – will be important for the Council. Bundesbank President Nagel was also out to say that the inflation outlook isn’t clear enough yet  and ‘it is too early to cut interest rates’ and a premature cut could result in a worse situation. Similarly Austrian Central Bank Governor Holzmann backed up that stance saying it was better to cut later (and faster) then too early and he did not see circumstances where the ECB would cut rates ahead of the Fed. While those last two ECB members are noted hawks, also out over the weekend was the more moderate Makhlouf of the Central Bank of Ireland who noted that ‘vigilance on wages is needed’ and the situation would be ‘a lot clearer’ by mid-year and he was in ‘no rush’ to cut rates.

Here in Ireland, consumer confidence dipped in February – to 70.2 from 74.2 in January. The report noted that while inflation was easing, still high energy costs and health insurance increases affected households who are worried about the outlook for their finances. However, looking at the three month moving average the trend is the index still remains broadly upwards and consumers may feel the cost of living difficulties are slowly coming back even if there is some way to go before they are very confident about the overall outlook again.

Fairly quiet on the economic data front today with main releases being CBI retail sales in the UK and US new home sales. There are a number of interesting central banks due out however, with BoE Chief Economist Huw Pill and ECB President Lagarde among those on the agenda today.