Summary After just a single month in the penalty box, the services ISM shot back up into expansion. New orders posted a stunningly swift rebound of more than 15 points to rise to 60.4. While December now looks like a blip, the breadth of services expansion has still slowed.     Easy to Talk Away Weakness The slowdown in services activity to end last year now looks more like a blip rather than the start of a lasting slowdown in the sector. That's at least according to the latest ISM services release, which revealed the index advanced 6.0 points to 55.2 after a temporary drop below 50 in December (chart). Ten of 18 industries reported growth during the month, and of the eight in contraction the only one to really surprise us was Arts, Entertainment & Recreation. Recall that this report extends beyond traditional 'service' industries and reflects the non-manufacturing side of the economy. Other areas of weakness in the January ISM services report (retail, wholesale trade, transportation & warehousing and mining) were consistent with weakness in goods spending. A pullback in construction also reflects a housing sector in correction, while information and finance & insurance reflects some right-sizing in those industries and a higher rate environment. While we find it easy to talk away some of the weakness in this report, month-to-month movements in the ISM can be volatile and the breadth of expansion has eased. That said, most components of the ISM improved, with the measure of business activity up 6.9 points to 60.4 and new orders matching that index level leaping 15.2 points after registering contraction in December (chart). New orders now match the highest level registered over the past 12 months, an indication that activity continues to hold up in the services sector.   "Shortened Lead Times and Increased Fill Rates" The supplier deliveries index came in right at the breakeven 50, adding 1.5 points from December's reading of 48.5 (chart). After months of hand-wringing about the state of the supply chain situation, there are indications that the gradual improvement continues. Respondents noted: “Post-holiday freight has proven to be more efficient” and “shortened lead times and increased fill rates.” To some extent, firms are learning to operate better despite only modest improvements. The healthcare profession has been beset by shortages since the onset of the pandemic and the scramble to procure an adequate supply of personal protective equipment. A respondent from the healthcare trade noted that demand "for services remains high, yet we continue to satisfy demand despite continuing supply chain disruptions." As supplier delivery times improves, the inventory draw down has become less urgent with that component rising more than four points to 49.2; still in contraction, but only barely. The sentiment about inventories at 55.8 is roughly unchanged from last month and suggests that stockpiles are still too high on balance. The easing of supply problems is also somewhat benefiting price pressure. At 67.8 the prices paid index remains firmly in expansion, but it has declined the past four consecutive months.

Due to the artificial bounce in activity in September, we believe the UK will narrowly avoid entering a technical recession in the fourth quarter of 2022. For Sweden, we expect the Riksbank to hike by 50 basis points next Thursday, due to persistent core inflation and uplifts in wage growth. US: Eyes on Jerome Powell's appearance at the Economic Club After last week’s excitement, it is a much quieter week for US data and events. With activity data softening and inflation cooling, the market remains unconvinced about the Federal Reserve’s desire to raise interest rates a “couple more times” as outlined by Fed Chair Jerome Powell this week. A recession appears to be the base case with expectations of policy easing in the second half of the year, which is putting downward pressure on the dollar and US Treasury yields. This is going someway to undermining the effectiveness of the Federal Reserve’s rate hikes at the short end of the curve as it battles to ensure inflation is eradicated from the system. Consequently, the highlight for the week could be Powell’s appearance at the Economic Club of Washington. If he fails to push back meaningfully against the market reaction, the implication would be that the Fed itself is relaxed with what the market is doing, which risks it pushing further in the direction of pricing future interest rate cuts. Several other Fed officials are scheduled to speak during the week. In terms of data, it is largely second-tier releases although the trade balance could be interesting. It has narrowed sharply through 2022, contributing positively to GDP growth in the second half of the year, but this appears to be unsustainable. It was driven by falling imports rather than rising exports and we see a strong chance that this partially unwinds in December. Meanwhile, the Conference Board measure of consumer confidence is expected to improve given the rally in equity markets and the fall in gasoline prices with a strong jobs market continuing to provide a firm underpinning for now. UK: Narrowly escapes late 2022 recession An artificial bounce in activity after the Queen’s funeral last September suggests the economy will narrowly avoid entering a technical recession in the fourth quarter. Nevertheless, we expect a modest contraction in the first quarter of this year and probably the second, meaning recession is still the base case. It is however likely to be very mild by historical standards, not least because the recent fall in gas prices now means the government can probably cancel April’s planned increase in household energy bills – and indeed they’ll probably have fallen from the current £2,500 annual average to £2,000 by the summer. Sweden: Riksbank to hike by 50bp, but the peak isn’t far off The Swedish economy is not looking great. GDP fell by half a percent in the fourth quarter, while house prices are down 15% on last February’s peak. For now though, the Riksbank is more worried about core inflation which has continued to climb. Important pay negotiations are due to conclude in a matter of weeks, and all signs point to an uplift in wage growth across wide areas of the economy. With new Governor Erik Thedeen warning against recent SEK weakness, and the Riksbank saying in the past that it wants to stay ahead of the ECB in its tightening cycle, we expect a 50bp rate hike next week. Nevertheless, with the housing market under pressure, we think we’re nearing the top for Swedish rates. We expect one further 25bp hike in April, marking the top of the cycle. Key events in developed markets next week Source: Refinitiv, ING Read the original analysis: Key events in developed markets next week

Europe It’s been a mixed finish to what has been a positive week for European markets, after US non-farm payrolls crushed expectations, adding 517k new jobs in January, while the unemployment rate fell to its lowest level since 1969 at 3.4%. The FTSE100 has outperformed, pushing above last month’s highs to a new 4-year peak, as it looks to close in on a record close, and the previous record high of 7,903. The slide in the value of the pound appears to be helping here with decent gains from the likes of the big US dollar earners, from health care and basic resources which is outperforming with Shell, Reckitt Benckiser and AstraZeneca helping to underpin the UK index. Also doing well is B&M European Retail after being raised to buy by Deutsche Bank with a price target of 580p. US US markets opened lower after their strong session yesterday after a disappointing reaction to last night’s numbers from Amazon, Alphabet and Apple. The latest January jobs report has also weighed a little despite the US economy adding a staggering 517k jobs during the month. The participation rate rose to 62.4% matching the highs seen last year, while the unemployment rate fell further to 3.4%. This was well beyond the most optimistic of forecasts and sends a message to complacent investors that the idea of rate cuts by year end is a little premature, and that’s being kind. The strength of the numbers also means that we could see more than one 25bps rate hike in the coming months, especially given the strong rebound that we saw in the ISM services index for January which confirmed that the US economy remains far from lacklustre.   The Nasdaq has underperformed in light of today’s stunning numbers with yields boomeranging back from their lows, and the US dollar rallying strongly. Apple, Amazon and Alphabet have all opened lower on disappointment over last night's earnings numbers as well as the rebound in yields and a stronger US dollar. All three have blamed the strength of the US dollar for the recent underperformance when it comes to lower revenues and profits. Apple hasn’t stayed in the red long, rebounding from its 200-day SMA and rising sharply, despite the Q2 outlook which predicted that revenues would decline by 5% in Q2. The more positive outlook for the US economy may be helping the company here, while its Chinese markets are likely to perform better as well as China continues its unlocking process.       FX If 24 hours is a long time in politics then the same can be said for FX markets, after today’s US payrolls report blew a hole in the argument that the Federal Reserve might be done when it comes to further rate hikes, and that slowing inflation could prompt rate cuts by year end. Today’s bumper January payrolls report, which saw 517k jobs added to the US economy, and the unemployment rate fall to 3.4%, more or less guarantees that we’ll see another 25bps in March and another hike thereafter. A labour market this tight is unlikely to see inflation come down quickly which is what markets were pricing in the lead-up to today’s numbers. Not surprisingly we’ve seen the US dollar rebound strongly, while yields have rebounded from their recent lows, the biggest gains coming against the likes of the commodity currencies of the Australian and New Zealand dollar. We’ve also seen the greenback rally against the Japanese yen as traders price out the prospect of US rate cuts by year end, as the US 2-year yield reverses its weekly losses and pushes to its highest level since 12th January.   Commodities Gold prices have plunged on the back of this afternoon’s payrolls numbers, dropping below the lows of this week at $1,900, and could well slip back to the $1,840 area on the back of a stronger US dollar and sharp recovery in yields after today’s bumper US jobs report. Crude oil prices have rallied strongly on the back of the better-than-expected US employment report, and ISM services numbers. although they still look set to close lower on the week, against a backdrop of uncertainty about Chinese demand and higher than expected US stockpiles which rose to their highest levels since September earlier this week.   

The Bank of England and European Central bank, both hiked rates by 50bps yesterday and have signaled another rate hike next month of similar magnitude a inflation still remain elevated. The Dollar Index has recovered from the sharp fall seen yesterday and may trade within 101-103 now while Euro has dipped from 1.1033 but could limit its downside to 1.08. EURJPY and USDJPY look bearish for a fall to 139-138 and 126 respectively while Pound and Aussie too have fallen and could head towards 1.20 and 0.70-0.6950 in the next few sessions. USDCNY has bounced from 6.70 and can now attempt to rise back to 6.80. A range of 6.70-6.80 may hold for now. USDRUB may rise towards the upper end of the 72-68 range. USDINR has managed to close above 82.10 yesterday which is likely to hold and produce a further rise to 82.50. EURINR has declined from 90.44 and could test 88 before pausing. The US Treasury yields have dipped further and are looking vulnerable to fall more unless a strong bounce-back is seen from current levels. The German Yields have declined sharply but have strong support coming up while above which the broader bullish view will continue to remain intact. The ECB raised the interest rates by 50-bps, more inline with the market expectation. The 10Yr and 5Yr GoI have risen back sharply from their day's low and can rise further if they get a strong follow-through from here. Dow has fallen back but is sustaining well above the support at 33600. DAX has surged towards the key resistance at 15600, from where a short corrective fall is expected to be seen in the coming sessions. Nikkei has moved up above 27500 and while above it there is room to target further upside. Shanghai has fallen back from the level of 3300 and is likely to remain range bound for some time. Nifty is managing to hold above the support at 17400 and while above it there is scope to move up higher in the near term. Brent and WTI is coming off towards the key support at $80.50-80 and $75 respectively which is expected to hold and produce a bounce back from there. Gold has declined as the resistance at 1975 held well. Silver has come down towards the support at 23.50 as expected and may fall further below 23.50. Copper is coming off breaking below the support at 4.1 and looks bearish to target further downside. Visit KSHITIJ official site to download the full analysis

Stocks are on the front-foot despite warnings from the ECB and BoE that we could be due another set of rate hikes. UK domestic stocks are particular outperformers, with the prospect of a lacklustre 2023 bringing a potential swift pivot from the BoE, says Joshua Mahony, senior market analyst at online trading platform IG. Central bank warnings bring risk-on push for stocks “European equities have received a shot in the arm today, with investors willing to overlook the prospect of additional rate hikes to focus on the theme of falling inflation and an impending end to this tightening phase. While the likes of Powell, Lagarde, and Bailey refrained from stating that this week’s rate hike is the final twist of the knife, it could yet be one and done for some. Meanwhile, growing optimism that inflation has peaked brings confidence that this year will allow for the dovish pivot theme to build a bullish financial market environment this year.  ” FTSE 250 highlights potential benefit of lacklustre UK growth picture “The FTSE 250 has been a major outperformer today, amid easing fears of a prolonged recession in the UK. BoE projections of an eight-quarter slowdown have been replaced by a five-quarter contraction, which is also less severe in nature. Rising interest rates and elevated prices have certainly brought significant hurdles for the UK economy to overcome. However, despite the IMF projection that the UK will be the only major economy to contract this year, that could actually help drive a swifter pivot from the BoE. While the central bankers will focus on the innate risks ahead for the economy, market price action brings clear confidence that this is the time to buy the dip ahead of the rip. ”

Dollar Index and Euro remain ranged within 101-103 and 1.08-1.10 while EURJPY is bearish below 142.50-142 and USDJPY can be ranged around 130. Pound and Aussie can have scope to fall towards 1.22 and 0.6950-0.69 while USDCNY is bearish below 6.80. USDRUB can trade within 71-68 while EURINR can trade within 88-89. USDINR can trade within 81.70-82.25. The US Treasury yields have dipped slightly within its broad range. The outcome of the US Fed meeting tonight can be key in setting the direction of move going forward. The German yields have dipped slightly but continue to remain bullish. More rise is on the cards. The ECB meeting outcome tomorrow will need a watch. The 10Yr and 5Yr GoI may remain volatile today on the back of the Union Budget. Need to see how they settle today after the Budget. For now both the 10Yr and 5Yr have room to dip before rising back again. Dow has rebounded sharply and may advance further in the near term. DAX is stuck between 15000 and 15200. Nikkei unbales to gather momentum to break above 27500. Shanghai is near the key support at 3250. Nifty has scope to break above the resistance at 17800 and rise further on the upside. Brent has rebounded and while it sustains above $85, a further rise can be seen in the near term. WTI has also risen back but could face immediate resistance at $80. Gold, Silver and Copper may continue to be range bound for a while. The FOMC meeting tonight needs a close watch. Visit KSHITIJ official site to download the full analysis