Interest Rate Outlook Susceptible to Further Shifts with Core PCE On Deck

There are two key data events this week that could again cause a shift with regards to the rate outlook for the Fed, namely the US Q4GDP print and the Core PCE Price Index. If either or both releases come in on the hotter side of expectations, any subsequent further repricing of monetary policy expectations could solidify the retracement in the USD and treasury yields seen so far in 2024.

Aside from these data releases, traders will also be keeping an eye out for the BOJ and ECB meetings. The Yen has been struggling against the USD so far this year as expectations for when the BOJ may start to move away from their ultra loose policy have been pushed back. Meanwhile, the ECB are expected to stay on hold at 4.5% for the benchmark rate when they meet on Thursday. In recent weeks, central bank officials form the FOMC and ECB have been pushing back against market expectations for early rate cuts, and this trend may continue when we hear from the ECB President.

Gold has been trading in subdued fashion in the face of a well-supported greenback and rising bond yields. The spot contract was seen trading at $2026 per ounce on Wednesday during the Asian session. The precious metal will likely be relying on softer US economic data in the form of the GDP and Core PCE Price Index figures if it is to mount a challenge back towards the$2050 mark and beyond. Conversely, any continuance of stronger US macroeconomic gauges could see gold drifting back towards the psychological $2000 level.

Elsewhere, oil has been moving higher this week as some risk premium has been injected into the price. Ongoing conflicts in the Middle East and between Russia and Ukraine is keeping potential supply disruptions on the agenda, with the WTI contract now hovering in the $74-$75 range.

Earnings season on the US continues, and while there have been a few hits and misses, so far there has been nothing to spook the market from a confidence perspective. If the big tech names deliver the goods again in terms of their Q4 2023 results, this could underpin the rally which has seen the S&P500 reach new highs. However, markets remain highly sensitive to the interest rate picture, so equities could be susceptible to a pullback if macro gauges further shift the monetary policy outlook. As such, all eyes will be on the US GDP and inflation indicator (Core PCE Price Index) this week.