BoJ meeting and inflation data from the US, the UK and Canada will be the highlights of the week ahead of us.
We will be taking a well deserved break and will continue publishing our weekly report in 2024. TradersWay analytics team wishes you Merry Christmas and Happy New Year!
USD
November inflation data came in line with expectations. Headline CPI came in at 3.1% y/y, tick down from 3.2% y/y in October. Energy component fell 2.3% m/m with gasoline prices dropping 6% m/m. Core CPI came in at 4% y/y, unchanged from October while it rose 0.3% m/m vs 0.2% m/m increase in October. Shelter component rose 0.4% m/m compared to 0.3% m/m increase the previous month and printed a 6.5% y/y increase. Services ex energy and shelter, Fed pays close attention to it, came in at hot 0.44% m/m. It should be running below 0.2% m/m in order for inflation to get down to 2%.
Fed has left Fed funds rate unchanged as was widely expected in the 5.25-5.50% range. In the statement they have acknowledged slowing economic growth and moderating job gains. Newly published dot plot shows rate at the end of 2024 at 4.6%, down from 5.1% as was seen in the September dot plot. Rate for the end of 2025 was downgraded to 3.6% from 3.9% in September while rate for 2026 was unchanged at 2.9%. Headline PCE and core PCE inflation are seen coming to the 2% level in 2026. GDP is expected to run below trend in 2024 at 1.4% before returning to trend in 2025.
Chairman Powell opened the press conference by acknowledging that inflation eased while there was no up in the unemployment rate. He added that policy rate is well in restrictive territory and that full effects of it are not yet felt. Powell admitted that they are at or near the peak of rate hikes cycle. He revealed that there was a discussion regarding rate cuts at the meeting. Powell stated that they are attentive to not making the mistake of holding rates high for too long. Additionally, Powell admitted that they will cut rates before inflation falls to 2%. There was a very dovish tone in the statement and press conference indicating that Fed is done with rate hikes and that rate cuts are on the table. Some analysts are now pricing in full 175bp of rate cuts for 2024. Fed’s Williams pushed back on those projections stating that it is premature to be thinking about rate cuts in March.
Retail sales for November printed 0.3% m/m vs -0.1% m/m as expected. Never underestimate US consumer as the old saying goes. The report shows that food services and drinking places saw biggest monthly gains followed by nonstore retailers and furniture stores. On the other hand, gasoline stations posted the biggest decline as gas prices fell. Control group, it goes into GDP calculation, saw increase of 0.4% m/m vs 0.2% m/m as expected while particularly strong result was in ex gas and autos category which rose 0.6% m/m from 0.1% m/m in October.
The yield on a 10y Treasury started the week and year at 4.23%, rose to 4.26%, then fell bellow 4% post FOMC meeting and finished the week at around 3.911%. The yield on 2y Treasury reached the high of 4.76% and also declined significantly after FOMC meeting. Spread between 2y and 10y Treasuries started the week at -48bp then widened to -53bp as curve inverted further. The 2y10y is inverted for over a year. FedWatchTool sees the probability of no change at January meeting at 88% while probability of a 25bp rate cut is 12%. Probability of March 2024 rate cut surged to 90% but subsequently declined to 68%.
This week we will have final Q3 GDP reading and Fed’s preferred inflation measure PCE.
Important news for USD:
Thursday:
GDP
Friday:
PCE
EUR
ECB has left key interest rates unchanged as was widely expected. The report states that tighter financial conditions dampen demand and in that way help lower inflation. ECB plans to reduce PEPP reinvestments from H2 and 2024 and stop reinvestment under PEPP program at the end of 2024. New projections see inflation lower to 5.4% in 2023 and 2.7% in 2024 while inflation will print 2.1% in 2025 and 1.9% in 2026. ECB will remain data-dependent in making their decisions.
At the press conference President Lagarde explicitly stated that there was no talk about rate cuts. She added that risks to growth are tilted to the downside. Inflation is expected to increase in December due to base effects but it will continue declining afterwards. Lagarde stated that wages are not declining and that more data is needed. ECB policymaker Villeroy stated that nobody mentioned rate cuts at the December meeting and added that bank’s next move, if there are no economic surprises in the data, should be to lower rates.
Eurozone preliminary PMI data for the month of December provided us with picture of a further deteriorating economy. Manufacturing PMI was unchanged at 44.2 with Germany showing slight improvement while France dropping further. Services slid deeper into contraction with 48.1 vs 49 and down from 48.7 in November. Both German and French services readings declined and dragged Eurozone composite to 47 from 47.6 the previous month. Demand is weak throughout the Eurozone and that weighs heavily on consumption. The reports states that “Even though input prices increased at a modestly slower rate, companies were able to raise output prices even more than in previous months. This suggests that businesses were successful in transferring a portion of the cost increases to customers. The European Central Bank acknowledges this dynamic in its latest statement, noting that “domestic price pressures remain elevated.”
GBP
November payroll change came in at -12k vs 39k in October. October unemployment rate remained at 4.2% while wages fell for the second month in a row and printed 7.2% 3m/y and 7.3% 3m/y for ex bonus wages. Wages falling down by more than expected present encouraging sign for BoE. October GDP came in at -0.3% m/m vs 0% m/m as expected and 0.2% m/m in September. All three sectors, services, production and construction, contributed negatively to the reading. Q4 has started on a much weaker note than expected and GDP was flat for the previous 3 months.
BoE has left the rate unchanged at 5.25% as widely expected. The vote came in at 6-3 also as expected with 3 members voting for a 25bp rate hike. They now see inflation at 4.5% by the end of the year, compared to 4.75% previously but add that it will take more time to bring inflation down. They are remaining data-dependent and are prepared to tighten further if evidence of more persistent inflationary pressures appear. Governor Bailey stated that they cannot confirm that interest rates have reached its peak and he pushed back on rate cuts adding that it is way too early to speculate on them. Much more hawkish sounding message than the one provided by Fed.
Preliminary December PMI data showed manufacturing dropping to 46.4 from 47.2 after three months of improvements in the sector. Services sector continued to strengthen and printed 52.7, up from 50.9 in November and thus managed to push up composite to 51.7 from 50.7 the previous month. There is a clear division between sectors in the economy as can be seen from the results and prices of goods are seen falling while prices of services are still elevated putting doubt whether inflation will come down as fast as expected.
This week we will have November inflation and final Q3 GDP data.
Important news for GBP:
Wednesday:
CPI
Friday:
GDP
AUD
Yet another strong employment report from Australia. November employment change came in at 61.5k smashing expectations of 11k. In October the economy added 55k jobs making this second consecutive stellar report. The unemployment rate rose to 3.9% from 3.7% in October but it was due to increase in participation rate to 67.2% from 67% the previous month. Almost all of jobs added were full-time (57k) with part-time filling in the rest (4.5k). This report will keep RBA debating what to do at their February meeting.
Deflationary data are coming from China. Headline inflation for the month of November printed -0.5% y/y vs -0.1% y/y as expected. Weak consumer demand coupled with falling oil prices pushed CPI deeper into deflation. PPI has shown a decline of 3% y/y while a decline of 2.8% y/y was expected. These numbers show that there is ample space for fiscal stimulus and PBOC obliged. They have kept 1-year MLF rate at 2.5% as widely expected but injected 1.45tln yuan into the system while only 650bn yuan was maturing today. This means that they have injected stimulus of 800bn yuan which is highest recorded monthly injection.
November economic activity data saw industrial production increase 6.6% y/y vs 5.6% y/y as expected and up from 4.6% y/y shown in October. Retail sales, on the other hand, missed expectations although they posted a very healthy increase (10.1% y/y vs 12.5% y/y as expected and up from 7.6% y/y the previous month). China had lockdown restrictions in November of 2022, meaning the base for comparison was low and that is the main reason for high numbers. Reports from Reuters are circulating that China will set its 2024 GDP target at around 5%.
NZD
Q3 GDP disappointed coming in at -0.3% q/q vs 0.2% q/q as expected and -0.6% y/y vs 0.5% y/y. Additionally, Q2 readings were revised down to 0.5% y/y and 1.5% y/y. The report shows declines in manufacturing, transportation, construction and wholesale. RBNZ has left open option to raise rates between meetings, but with growth crumbling we think that further rate hikes will not be delivered.
CAD
October manufacturing sales printed a 2.8% m/m decline. Wholesale posted second month of declines coming in at -0.5% m/m after a -0.6% m/m decline in September. Housing starts in November plunged to 212.6k from 272.3k the previous month. CAD has managed to benefit from post-Fed drop in USD but incoming economic data are not encouraging.
This week we will have inflation data.
Important news for CAD:
Tuesday:
CPI
JPY
Preliminary December PMI showed manufacturing slipping further into contraction and coming in at 47.7, down from 48.3 in January. Manufacturing has been in contraction since May and this reading matches the February low. For number lower than this we have to go back all the way to 2020 during pandemic. Services posted a great improvement to 52 from 50.3 previous month thus lifting composite back into expansion with 50.4 print. The report shows stronger decline for output, new orders and new export orders in the manufacturing sector while services shows stronger growth in all of those categories. One concerning factor is that input prices sed stronger growth for both sectors indicating mounting inflation pressures.
This week we will have BoJ meeting. No changes to rate are expected but we could see abandoning of Yield Curve Control.
Important news for JPY:
Tuesday:
BoJ Interest Rate Decision
CHF
SNB total sight deposits for the week ending December 8 came in at CHF471.7bn vs CHF474.1bn the previous week. Deposits remain in the well defined range that is now lasting for over four months. SNB has left policy rate unchanged at 1.75% as was widely expected. CPI projections have been lowered and they now show CPI at 1.9% in 2024 vs 2.2% previously and CPI at 1.6% in 2025 vs 1.9% previously. The part of the statement showing bank’s willingness to further tighten has been omitted indicating that the bank is now on hold. SNB Chairman Jordan stated that they are no longer focused on forex sales adding that risks to inflation are currently balanced. He added that members believe that current stance of monetary policy is appropriate.
