We start the new year with a bang as top tier US and eurozone economic data point to a busy and volatile first week. Hopes are (too?) high that major central banks will begin cutting interest rates soon, with the Fed pivot expected to play out in March. Money markets see above an 80% chance of a 25bp rate cut at that FOMC meeting and around 150bps of total easing for the year. Euphoric stock markets are near record highs and will be tested by the upcoming economic releases.

While the disinflation process is well on track and is expected to continue, the Fed’s other mandate – employment – will likely become increasingly important over the next few months. Friday’s marquee non-farm payrolls data is expected to show that job growth continues to slow. But companies aren’t laying off employees in big numbers which is allowing wages to rise at a moderate pace.

This is crucial for the “Goldilocks” scenario which has supported risky markets over the last few months. Very strong job gains or a sudden drop in employment could shake investors’ confidence in the soft landing theme. All three major US stock market indices are currently in overbought territory. The market’s fear gauge, the VIX index, hit more than three-year lows last month.

The FOMC minutes and ISM data points for manufacturing and services will add further colour in the week and may cause volatility in the dollar. After its rollercoaster ride in 2023, the greenback finished the year with losses of around 3% against a basket of currencies. Falling Treasury yields, on heightened expectations of aggressive rate cuts, will probably need to continue to see another down leg in USD for now.

Eurozone inflation will be in the spotlight as well on Friday with contrasting figures forecast. The headline will snap a sharp drop which saw it undershoot expectations for three consecutive months. This will be largely down to government energy support measures meaning a lower “base” to which December 2023 prices are compared. However, the core numbers should carry on falling which will assuage the ECB hawks.

In Brief: major data releases of the week

02 January 2024, Tuesday

-China Caixin Manufacturing PMI: Consensus sees a December print of 50.4 from the prior 50.7, so remaining in expansionary territory. Activity data in the past few months has shown modest improvement. The official PMIs are released on Sunday December 30.

03 January 2024, Wednesday

-US ISM Manufacturing: Expectations are for a slight uptick to 47.2 from 46.7. But that would still represent a 14^th straight month in contraction. That means new orders will likely shrink for 16 consecutive months, which is since the pandemic bounce faded.

–FOMC Meeting Minutes: This meeting heralded what markets saw as a Fed pivot and easier financial conditions. Focus will be on how much pushback there was against policy easing. Attention will also centre on the broad range of dots in the projections, with the median now being three 25bp rate cuts in 2024. Markets currently price in more than double this.

05 January 2024, Friday

–Eurozone Inflation: Headline CPI is forecast to rise to 3.0% from 2.4%, though falling gasoline prices could result in a miss. The core is seen falling to 3.4% from 3.6% primarily due to base effects. That would be the lowest print since March 2022.

–US Non-Farm Payrolls: Analysts expect a headline print of 158k, down from the prior 199k. That saw the 3-month average drop to 215k. The jobless rate is expected to tick up one-tenth to 3.8% and average hourly earnings tick down to 0.3% m/m and 3.9% y/y.

–Canada Jobs: Consensus forecasts the economy added around 13.5k jobs in December. Unemployment likely rose one-tenth higher to 5.9% while wage growth is predicted to remain elevated at 5.0%.

–US ISM Services: This sector is predicted to fall modestly in December to 52.5 from 52.7. This comes after the five-month low in October at 51.8. A reading above 50 indicates growth in services, which account for more than two-thirds of the economy.