The Nasdaq Composite reached a historic milestone on Friday, surpassing its previous record set in 2021, driven by investor optimism surrounding anticipated rate cuts and the forthcoming artificial intelligence (A.I.) boom. Megacap technology stocks are the clear-cut favoured choice for investors seeking exposure to these trends.

Meanwhile, the S&P 500 index closed above the 5100 mark for the first time, propelled by the strong performance of leading tech companies. Chipmaking giant Nvidia, a standout performer in the A.I. market, surged by over 260% in the past 12 months and recorded another impressive 4% gain on Friday. Meta, formerly known as Facebook, also experienced a notable uptick, jumping more than 2% during the trading day. These gains underscored the market's confidence in tech companies as key players in the evolving landscape shaped by advancements in A.I. and potential rate adjustments.

Shorter-maturity Treasurys experienced a notable rally leading into the weekend, prompted by underwhelming U.S. manufacturing data and a significant downward revision to the University of Michigan sentiment index.

Both the miss in the ISM manufacturing index and the downward revision to the University of Michigan sentiment index hinted at a potential loss of momentum in an otherwise robust economy. While revisions to economic indicators often don't garner much attention, this time proved different, mainly as investors were keen to identify any signals suggesting a potential slowdown in the U.S. economy.

Consumer moods deteriorated rapidly late last month, experiencing a decline more pronounced than any other survey period since March 2020. That particular month commenced with widespread COVID-19 health concerns and culminated in societal upheaval reminiscent of the 1918 flu.

Interestingly, despite the sombre tone of the data, the actual release was somewhat overshadowed by some outlets more focused on promoting Torsten Slock's unusually timed call for no rate cuts this year, possibly diverting attention from the concerning consumer sentiment figure. Still, professional traders were observant of the incrementally dovish data and closely monitored the reaction at the front end of the market.

"For all but one index component, readings [in February] were higher than all values between mid-2021 and the end of 2023," survey director Joanne Hsu said. "Consumers perceived few changes in the state of the economy since the start of the new year, and they appear to be assured that inflation will continue on a favorable trajectory."

While consumers may not find assurance in the notion of inflation continuing along a "favourable trajectory," especially when tallying up their weekly grocery bill, traders and the Fed will, however.  

This past week, we were inundated with a plethora of new U.S. economic indicators crucial for refining economic outlooks and portfolio positions. Despite an arguably hot PCE, the overall picture still suggests a significant slowdown in the first quarter.

The 4th quarter GDP revision should be taken for what it is: an outdated revision. However, more current data in new home sales, durable goods orders, and consumer confidence all missed consensus forecasts, indicating potentially smaller gains in real consumer spending and more significant declines in business equipment spending in the first quarter.

The new economic data collectively suggests a noticeable slowdown in first-quarter GDP growth, likely around 2.0% annualized compared to the fourth quarter's revised 3.2% pace. But on a positive note, this trajectory indicates that the economy is still in the soft landing zone.

Stepping back from the trees to see the forest, the recent slew of global economic data indicates that growth remains steady while inflation follows a somewhat jagged trajectory toward normalization. Thus far, the significant rate hikes implemented over the past few years have struck a delicate balance. They have curbed growth sufficiently to alleviate extreme inflation pressures without plunging the economy into a full-blown downturn.

In the United States, some observers question whether the 0.4% increase in the core PCE deflator in January represents meaningful progress in addressing inflation concerns. However, considering the broader context, the annual trend reveals moderation, reaching its slowest pace since March 2021 at 2.8%—half its peak two years earlier. Additionally, the six-month trend stands at a more manageable 2.5%. Favourable base effects indicate that the yearly pace could decline over the next few months.

While other core metrics show slight increases, they also moderated in January. The Dallas Fed's trimmed mean stood at 3.2%, while the Cleveland Fed's median PCE was 3.5%. While somewhat elevated, these figures suggest a gradual easing of inflationary pressures and contribute to a more favourable outlook for inflation dynamics.

The main concern regarding the soft landing scenario in the United States is the possibility that there may not be a landing at all, with a growing chorus of economists suggesting that rate cuts could be delayed until Q4. At the same time, last week's economic indicators presented a mixed picture, generally leaning towards a softer tone but not indicative of an economy on the verge of a downturn.

The upcoming jobs report for next week is anticipated to reveal a cooling in payroll gains to around 190,000 after robust prints in the previous two months. Collectively, these results should clip Treasury yields wings and cause a weaker U.S. dollar. 

FOREX MARKETS

The abrupt increase in USDJPY during London afternoon trading on Friday lacked a clear rationale and may have been influenced by transaction flows. While there may have been some justification for a move above 150 when Bank of Japan chief Ueda reiterated the central bank's patience regarding rate hikes, the bid reaching 150.70? Maybe some freshly minted shorts below 149.50-75 got taken out above 150.50.

Comments made this week by the Bank of Japan's Hajime Takata have stirred speculation about a potential shift in policy stance. This development is causing investors to reassess their positions, particularly in the yen, which had been under selling pressure. Compounding this sentiment shift is that leveraged funds have significantly increased their bearish bets against the yen, marking the highest level in over six years. Outside of intervention rhetoric, combining Takata's remarks and the positioning of leveraged funds contributes to a pause in the yen's downward trend.

There is ongoing market debate regarding the timing of the first interest rate hike, with some discussions shifting from April to March. However, accompanying this sift, expectations have been revised regarding the magnitude of the initial rate hike. Initially anticipated to be a 20 basis points (bps) increase, the market sentiment has now adjusted to a forecast of a smaller 10 bps hike for the first move in March. 

The anticipation of a 10 basis points (bp) interest rate hike is expected to negatively impact the USD/JPY exchange rate, potentially causing it to decline below 147 and possibly lower on an overshoot.

As we suggested on Thursday, the stronger the JPY gets, the more stops get triggered, reflecting the risk that traders and yen bears are exposed to. Investors rapidly exiting their short positions could intensify a significant upward surge in the value of the yen.

The upcoming pivotal moment arrives as BOJ policymakers gather for a two-day meeting starting on March 18 to chart the course of monetary policy in the future. While the possibility of significant changes during that meeting cannot be ruled out entirely, there is no guarantee of an imminent policy pivot.

March might not offer definitive answers regarding US inflation, the state of the economy, or the timing of a potential Fed rate cut. However, it will reveal whether markets demand more pronounced declines in US data to reconsider expectations of monetary easing. While the dollar's direction may remain unclear in March, we anticipate increasing bearish pressure on the USD to pick up this month.

GOLD MARKETS

US rate cut momentum is gathering, at least if you think bullion is a leading indicator. Gold's prices climbed to a one-month high partly due to the latest U.S. economic data, which suggests a slowdown in U.S. economic action. The prospect of decelerating the U.S. economy and the downward trending inflation has bolstered expectations for a Federal Reserve rate cut, with gold bulls peculating that such a move could materialize as early as June. As a result, investors are turning to gold as a safe-haven hedge against a weaker U.S. dollar,

OIL MARKETS

Oil prices experienced a notable rise, briefly surpassing $80 per barrel for West Texas Intermediate (WTI), driven by a short covering rally ahead of the OPEC+ meeting. Short sellers were unsettled by the possibility of the price-fixing cartel extending their voluntary production cuts throughout 2024. This speculation prompted a surge in buying activity during the busy New York morning session.

However, prices retreated when the ISM and U.S. Consumer Confidence data provided evidence suggesting that specific sectors of the U.S. economy may face mounting pressure from the high-rate environment than previously anticipated. 

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